Quiz #388 answers

• 1. Assume that a nation is running an on-going external deficit of 2 per cent of GDP. If the private domestic sector successfully spends less than its income, then we would always find a public sector deficit being recorded.

Answer: True

• 2. The government has to issue debt if the central bank is targetting a non-zero policy rate and is reluctant to pay a return on excess bank reserves.

Answer: True

• 3. Assume that inflation and nominal interest rates are both constant and zero and a country has a public debt to GDP ratio of 100 per cent. The approach taken by those who support fiscal austerity is to run primary fiscal surpluses to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy can still work even if the economy contracts under the burden of the surpluses.

Answer: True