1. Assume that a nation is continuously running an external deficit of 2 per cent of GDP. In this economy, if the private domestic sector successfully saves overall, we would find:
Answer: A fiscal deficit (spending greater than tax receipts)
2. Given that government bonds constitute a component of non-government sector wealth, that sector's net worth rises if the government issues bonds to match its deficit spending.
Answer: False
3. While fiscal deficits rise due to the operation of the automatic stabilisers, these effects work in a counter-cyclical fashion to ensure that the government fiscal balance returns to its appropriate level once growth resumes.