Quiz #343 answers

• 1. If the real interest rate (difference between nominal interest rate and inflation) is constant, then a currency-isuing government, which matches its net spending $-for-$ with debt issuance, could double its fiscal deficit without pushing up the public debt ratio.

Answer: True

• 2. The new conservative government of Finland claims that domestic deflation (cutting wages and conditions for workers) will spark an export boom and provide the capacity for the government to run primary surpluses without compromising real economic growth. If Finland did actually achieve positive net exports then the government could push for a primary fiscal surplus knowing it will not compromise growth.

Answer: False

• 3. 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