Quiz #357 answers

• 1. Many progressive commentators believe that bank lending should be more closely regulated to ensure that all bank loans were backed by reserves held at the bank. However, this would unnecessarily reduce the capacity of the banks to lend.

Answer: False

• 2. Assume a nation is running an external surplus equivalent to 2 per cent of GDP and the private domestic sector is currently saving overall 1 per cent of GDP. In this situation, the government must be running:

Answer: A fiscal surplus equal to 1 per cent of GDP.

• 3. Start from a situation where the external surplus is the equivalent of 2 per cent of GDP and the fiscal surplus is 2 per cent of GDP. If the fiscal balance stays constant as a percent of GDP and the external surplus rises to the equivalent of 4 per cent of GDP then:

Answer: National income rises and the private domestic surplus moves from 0 per cent of GDP to 2 per cent of GDP.