Quiz #42

• 1. With the EMU creating a fixed nominal exchange rate system across member states and monetary policy fixed by the ECB, fiscal policy is the only policy left to a member country to deal with a crisis. The problem then is that its ability to use fiscal policy is constrained by the Maastricht Treaty.
• False
• True
• 2. The Euro monetary system could not possibly be an Optimal Currency Area because wages are not flexible across the member states.
• False
• True
• 3. It is often argued that the central bank sets the short-run interest rates but the private market demand and supply sets the long-term interest rate. This is particularly important in the current debate that bond markets will close a government down if it senses the deficit is too large. However the reality is that the central bank can control interest rates at all yields by issuing debt at different maturities on a fixed yield basis. The only reason that private market forces have any influence is because the government voluntarily constrains itself to issue debt $-for-$ on an auction basis to match net spending.
• False
• True
• 4. If the government manages to balance its budget over a business cycle then the private domestic sector balance (I - S) will on average be in deficit exactly equal to the average current account deficit over the same period. In other words, if a nation has a current account deficit, then a balanced budget over the business cycle will force the private domestic sector overall to be building debt over that same cycle.
• False
• True
• 5. The private domestic sector can save overall even if the government deficit is in surplus as long as net exports are positive. This is the Norwegian situation. But typically with net exports negative, the government has to run deficits to enable to private domestic sector to save.
• False
• True