Quiz #381

• 1. Given government bonds represent a source of wealth for the non-government purchaser, a decision to allow the central bank to directly purchase government bonds to exactly match ($-for-$) the increase in net public spending will, initially, result in lower net worth for the non-government sector relative to the situation where the government sells the bonds to the private markets.
• False
• True
• 2. Assume that a national 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 always find:
• Cannot tell because we don't know the scale of the private domestic sector saving as a % of GDP.
• A fiscal deficit (public spending greater than revenue).
• A fiscal surplus (public spending less than revenue).
• 3. If we assume that inflation and nominal interest rates are both zero and constant (not to different to reality), and consider a country with a public debt to GDP ratio of 100 per cent which the mainstream economists consider to be dangerously high. The mainstream prescription is to run primary fiscal surpluses (public spending net of interest payments greater than tax revenue) to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy will only work if there is real GDP growth to generate the necessary extra tax revenue.
• False
• True

Quiz #381 answers

• 1. Given government bonds represent a source of wealth for the non-government purchaser, a decision to allow the central bank to directly purchase government bonds to exactly match ($-for-$) the increase in net public spending will, initially, result in lower net worth for the non-government sector relative to the situation where the government sells the bonds to the private markets.

Answer: False

• 2. Assume that a national 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 always find:

Answer: A fiscal deficit (public spending greater than revenue).

• 3. If we assume that inflation and nominal interest rates are both zero and constant (not to different to reality), and consider a country with a public debt to GDP ratio of 100 per cent which the mainstream economists consider to be dangerously high. The mainstream prescription is to run primary fiscal surpluses (public spending net of interest payments greater than tax revenue) to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy will only work if there is real GDP growth to generate the necessary extra tax revenue.

Answer: False