1. A budget surplus equivalent to 1 per cent of GDP ratio necessarily reflects a more contractionary fiscal policy stance than a budget deficit equivalent to 1 per cent of GDP.

Answer: False

2. Any substantial increase in the monetary base can be sustained only if interest rates are pushed down to low levels, ultimately to zero.

Answer: False

3. 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 fall in Year 2.

Answer: True