Quiz #310 answers

• 1. Say a currency-issuing government plans to achieve a fiscal surplus of 0.1 per cent of GDP in the next financial year. The aim underpins a massive fiscal shift from a fiscal deficit of around 3 per cent of GDP in that period. If the actual fiscal outcome remains in deficit at the end of the following financial year, the said government will be rightly considered not to have gone hard enough on its fiscal austerity plans.

Answer: False

• 2. Modern Monetary Theory (MMT) brings an understanding of the way central banks purchase and sell government bonds to manage liquidity in the overnight cash markets and thus sustain their target rate of interest. MMT also leads to the conclusion that a central bank could still increase interest rates even if a currency-issuing government instructed it to directly purchase treasury debt to facilitate the national governments fiscal deficit.

Answer: True

• 3. Quantitative easing aims to stimulate aggregate demand by reducing long-term investment rates whereas deficit spending aims to stimulate aggregate demand via tax cuts or direct public spending. Both policies ultimately work by increasing the net financial assets held by the non-government sector even if QE is less (even largely) ineffective.

Answer: False