Quiz #46

• 1. When a country is running an external deficit and the national currency issuing government achieves a balanced budget averaged from peak to peak of the business cycle, the private domestic sector will be
• spending more than it is earning with a deficit on average a bit lower than the average current account (external) deficit over the cycle.
• spending more than it is earning with a deficit on average equal to the average current account (external) deficit over the cycle.
• spending more than it is earning with a deficit on average a bit higher than the average current account (external) deficit over the cycle.
• all you can really say is that it will be increasing its indebtedness.
• 2. Monetary policy is of some importance because interest rates changes are the way in which saving (rising when interest rates rise) and investment (falling when interest rates rise) adjust to ensure that aggregate demand doesn't decline when the non-government sector tries to increase its saving ratio and consumption falls. The problem is that central banks haven't adequately allowed the rates to adjust enough because they have been targetting inflation.
• False
• True
• 3. While a sovereign government is not revenue constrained and voluntarily constrains itself to borrow to cover its net spending position, it remains the case that by substituting its spending for the borrowed funds it reduces the private capacity to borrow and spend.
• False
• True
• 4. It will be appropriate for national governments around the world to withdraw their discretionary stimulus packages once their private sector spending recovers. Otherwise inflation will result.
• False
• True
• 5. The Greek government can become insolvent and be forced into default if bond markets "stop" funding their spending. The same logic applies to Ireland, Spain and Portugal but not to Germany because the latter has a strong net export surplus.
• False
• True