1. If the national accounts of a nation reveal that its external surplus is equivalent to 2 per cent of GDP and the private domestic sector is saving overall 3 per cent of GDP then we would also observe:
Answer: A budget deficit equal to 1 per cent of GDP.
2. In a currency-issuing nation, real surpluses must be expropriated from productive workers to feed the unemployed.
Answer: True
3. The British government's budget deficit has been rising despite the Government's stated fiscal austerity stance. We can conclude from the evidence at hand that the austerity mantra of the British government doesn't correctly describe its fiscal policy stance.
Answer: False
4. The impact on aggregate demand would be invariant between the government matching its deficit spending with private bond issues and the situation where the government instructed the central bank to buy its bonds to match the deficit.
Answer: True
5. Premium Question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The inflation rate is subdued at 2 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 2 per cent (and this is the rate the government pays on all outstanding debt). The government's budget balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the debt ratio rises by 4 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 4 per cent of GDP in recognition of the severity of the recession. In doing so it stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. The central bank holds the nominal interest rate constant but inflation falls to 1 per cent given the slack nature of the economy the previous year. Under these circumstances, the public debt ratio falls even though the budget deficit has risen because of the real growth in the economy.