1. If the national accounts of a nation reveal that its external surplus is equivalent to 2 per cent of GDP and the private domestic sector is saving overall 3 per cent of GDP then we would also observe:
Answer: A fiscal deficit equal to 1 per cent of GDP.
2. The British government's fiscal deficit rose despite the Conservative government's stated fiscal austerity stance. We can conclude from that fact that the austerity mantra of the British government doesn't correctly describe its fiscal policy stance.
Answer: False
3. In Year 1, the economy plunges into recession with nominal GDP growth falling to minus 1 per cent. The inflation rate is subdued at 2 per cent per annum. The outstanding public debt to GDP ratio was 100 per cent at the start of the year and the nominal interest rate remains at 2 per cent (and this is the rate the government pays on all outstanding debt). The government's fiscal balance net of interest payments goes into deficit during the year equivalent to 1 per cent of GDP and the public debt ratio rises by 4 per cent. In Year 2, the government stimulates the economy and pushes the primary fiscal deficit out to 4 per cent of GDP in recognition of the severity of the recession. In doing so it stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. The central bank holds the nominal interest rate constant but inflation falls to 1 per cent given the slack nature of the economy the previous year. Under these circumstances, the public debt ratio falls in Year 2, even though the fiscal deficit has risen because of the real growth in the economy.