Quiz #382 answers

• 1. A fiscal deficit equivalent to 2 per cent of GDP signals that the government is adopting a less expansionary policy stance than if the fiscal deficit outcome was equivalent to 3 per cent of GDP.

Answer: False

• 2. When the government borrows from the non-government sector to match an increase in net public spending (deficit increase), the resulting increase in aggregate spending is less than would be the case if there was no bond sale.

Answer: False

• 3. Consider the following table which describes four different economies in terms of the behavioural parameters relating to the leakages to aggregate demand. Assume that in all four economies, there is idle capacity, the central bank holds all interest rates constant, inflation is constant and there is no changes in international competitiveness.
  Which economy would deliver the largest national income bonus for a given discretionary expansion in government spending (ignore the possibility of longer term wealth effects)?

Answer: Economy A