Quiz #187

• 1. Modern Monetary Theory (MMT) characterises the interaction between the government sector (treasury and central bank) and the non-government sector in terms of vertical transactions, which change the net financial asset position of the non-government sector. These are in contrast with transactions within the non-government sector, which net to zero in terms of the impact on the financial asset position. Both quantitative easing (a central bank operation) and net public spending (a treasury operation) fit this depiction of vertical transactions.
• False
• True
• 2. The real wage can only grow if the rate of growth in earnings outstrips labour productivity growth.
• False
• True
• 3. A 3 per cent budget deficit to GDP ratio is more stimulatory than a 1 per cent deficit even if we do not know what the structural and cyclical break down of the aggregate figure is.
• False
• True
• 4. Modern Monetary Theory (MMT) leads to the conclusion that a central bank could still increase interest rates even if the US government instructed it to directly purchase treasury debt to facilitate the national governments budget deficit rather than the treasury selling the debt into the private bond market.
• False
• True
• 5. Premium Question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1.0 per cent. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The inflation rate is stable at 1 per cent per annum. The government's primary budget balance records a deficit equivalent to 1 per cent of GDP and the public debt ratio rises by 3 per cent. In Year 2, the government pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.
• False
• True