Quiz #360

• 1. If the fiscal balance of a currency-issuing national government moves into surplus:
• It is a sign that the government is trying to constrain economic activity.
• It is a sign that the government is worried that inflation is rising.
• You cannot conclude anything about the government's policy intentions.
• Options (a) and (b).
• 2. A nation that continues to record an external surplus due to strong net exports can safely run a fiscal surplus without impeding economic growth.
• False
• True
• 3. In Year 1, we observe a subdued inflation rate of 1 per cent per annum. At the start of the year, the outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The economy plunges into recession with nominal GDP growth falling by 1 per cent. As a result, the government's fiscal balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the public debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and doubles the primary fiscal deficit relative to GDP and, in doing so, stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the fiscal deficit because of the real growth in the economy.
• False
• True
• Not enough information to make a conclusion

Quiz #360 answers

• 1. If the fiscal balance of a currency-issuing national government moves into surplus:

Answer: You cannot conclude anything about the government's policy intentions.

• 2. A nation that continues to record an external surplus due to strong net exports can safely run a fiscal surplus without impeding economic growth.

Answer: False

• 3. In Year 1, we observe a subdued inflation rate of 1 per cent per annum. At the start of the year, the outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The economy plunges into recession with nominal GDP growth falling by 1 per cent. As a result, the government's fiscal balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the public debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and doubles the primary fiscal deficit relative to GDP and, in doing so, stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the fiscal deficit because of the real growth in the economy.

Answer: False