Quiz #188 answers

• 1. If the government increases its budget deficit as a percentage of GDP it reduces the real resources (crowds out) available for private productive uses.

Answer: True

• 2. For a nation running a current account deficit, the government budget will always be in deficit no matter what the government's intentions are if the private domestic sector saves overall.

Answer: True

• 3. Central banks manipulate bank reserves to control the policy target interest rate.

Answer: True

• 4. If the central bank chooses to pay a return on overnight reserves held by the commercial banks equal to the current policy rate then the overall level of reserves held by the latter will be higher than otherwise (ignore any reserve requirements).

Answer: True

• 5. Premium Question: It would be impossible for a government to avoid issuing debt to the private sector to match its budget deficit while the central bank was simultaneously targeting a positive short-term policy rate.

Answer: False