Quiz #326 answers

• 1. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.

Answer: True

• 2. The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.

Answer: False

• 3. The private domestic sector can save overall even if the government fiscal balance is in surplus as long as the external sector is adding to total demand in the economy.

Answer: False