Quiz #394

• 1. If calibrated correctly, quantitative easing (QE) programs run by central banks can replace the net financial assets held by the non-government sector, which are destroyed by fiscal austerity programs.
• False
• True
• 2. The expansionary impact of deficit spending on aggregate spending (demand) is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.
• False
• True
• 3. The government is attempting to stimulate the economy via a discretionary expansion of the fiscal deficit. The private market orientated advisors tell them to cut taxes and 'privatise' the expansion whereas the more civic-minded advisors argue that there is a need for improved public infrastructure which requires increases in government spending. So imagine that the government is choosing between a tax cut that will reduce tax revenue at the current level of national income by $x and a spending increase of $x. Which policy option will have the greater initial impact on aggregate demand?
• Tax cut
• Spending increase
• Both will be equivalent
• There is not enough information to answer this question

Quiz #394 answers

• 1. If calibrated correctly, quantitative easing (QE) programs run by central banks can replace the net financial assets held by the non-government sector, which are destroyed by fiscal austerity programs.

Answer: False

• 2. The expansionary impact of deficit spending on aggregate spending (demand) is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.

Answer: False

• 3. The government is attempting to stimulate the economy via a discretionary expansion of the fiscal deficit. The private market orientated advisors tell them to cut taxes and 'privatise' the expansion whereas the more civic-minded advisors argue that there is a need for improved public infrastructure which requires increases in government spending. So imagine that the government is choosing between a tax cut that will reduce tax revenue at the current level of national income by $x and a spending increase of $x. Which policy option will have the greater initial impact on aggregate demand?

Answer: Spending increase