Quiz #189 answers

• 1. Central banks provide reserves to the commercial banking system at some penalty rate. However, this compromises their capacity to control bank lending and target a given monetary policy rate.

Answer: True

• 2. If inflation rate remained equal to the nominal interest rate, then the government deficit could double (from say 2 to 4 per cent of GDP) without pushing up public debt as a proportion of GDP.

Answer: True

• 3. The Troika has placed a lot of reliance on nations such as Greece exporting their way out of crisis on the back of extensive cuts to domestic spending as they push their budgets into surplus. This strategy can only be associated with real economic growth if the private domestic sector spends more than it earns.

Answer: False

• 4. If the share of wages in national income falls then the workers' standard of living falls.

Answer: False

• 5. Premium Question: Assume that inflation is stable, there is excess productive capacity, and the central bank maintains its current interest rate target. If on average the government collects an income tax of 20 cents in the dollar, then total tax revenue will rise by 0.20 times $x if government spending increases (once and for all) by $X dollars and private investment and exports remain unchanged.

Answer: False