Quiz #368 answers

• 1. Assume that inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy settings. Then, if government spending increases by $X dollars and private investment and exports are unchanged, we know, as a result of our understanding of the expenditure multiplier, that nominal GDP will grow until the sum of taxation revenue, import spending and household saving rises by exactly $X dollars.

Answer: True

• 2. When a currency-issuing government voluntarily constrains itself to borrow from the non-government sector to cover its fiscal deficit, it substitutes its spending for the borrowed funds and reduces the private capacity to borrow and spend.

Answer: False

• 3. The crucial difference between a monetary system based on the convertible currency backed by gold and a fiat currency monetary is:

Answer: that under the former system, the national government had to issue debt to cover spending above taxation.