Quiz #451

• 1. Assuming the expenditure multiplier is greater than 1, deficit spending will have a greater impact on aggregate demand if there are no offsetting monetary operations by the central bank (government bond sales) draining the excess reserves created.
• False
• True
• 2. If the government succeeds in reducing its net spending by say $10 billion, the net financial assets destroyed by this fiscal withdrawal could be replaced by the central bank engaging in a $10 billion quantitative easing program.
• False
• True
• 3. Which fiscal deficit is the most expansionary?
• 1 per cent of GDP
• 2 per cent of GDP
• 3 per cent of GDP
• Cannot say because it depends on the decomposition of the structural and cyclical components.

Quiz #451 answers

• 1. Assuming the expenditure multiplier is greater than 1, deficit spending will have a greater impact on aggregate demand if there are no offsetting monetary operations by the central bank (government bond sales) draining the excess reserves created.

Answer: False

• 2. If the government succeeds in reducing its net spending by say $10 billion, the net financial assets destroyed by this fiscal withdrawal could be replaced by the central bank engaging in a $10 billion quantitative easing program.

Answer: False

• 3. Which fiscal deficit is the most expansionary?

Answer: 3 per cent of GDP