1. Assume a nation is running an external surplus equivalent to 2 per cent of GDP and the government manages to run a fiscal surplus equivalent to 1 per cent of GDP (taxes greater than spending). The national income changes associated with these balances would ensure that the private domestic sector was running an overall deficit of 1 per cent of GDP.

2. Starting from the external situation in Question 1, with the surplus being the equivalent of 2 per cent of GDP but this time the fiscal surplus is currently 2 per cent of GDP. If the fiscal balance stays constant and the external surplus rises to the equivalent of 4 per cent of GDP then you can conclude that national income also rises and the private surplus moves from minus 2 per cent of GDP to plus 2 per cent of GDP.

3. If all bank loans had to be backed by reserves held at the bank (a 100 per cent reserve requirement) then the capacity of the banks to lend would be more constrained which would help maintain financial stability.