Quiz #460

• 1. The net worth of the non-government sector rises immediately as a result of the government issuing bonds to exactly match ($-for-$) the increase in net public spending.
• False
• True
• 2. Assume that a national is continuously running an external deficit of 2 per cent of GDP. In this economy, if the private domestic sector successfully saves overall, we would always find:
• A fiscal deficit
• A fiscal surplus
• Cannot tell because we don't know the scale of the private domestic sector saving as a % of GDP.
• 3. At present inflation and nominal interest rates are low and constant (so for this question, assume they are both zero and constant). Consider a country with a public debt to GDP ratio of 100 per cent, which the mainstream economists consider to be dangerously high. The mainstream prescription is to run primary fiscal surpluses to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy will only work if there is real GDP growth.
• False
• True

Quiz #460 answers

• 1. The net worth of the non-government sector rises immediately as a result of the government issuing bonds to exactly match ($-for-$) the increase in net public spending.

Answer: False

• 2. Assume that a national is continuously running an external deficit of 2 per cent of GDP. In this economy, if the private domestic sector successfully saves overall, we would always find:

Answer: A fiscal deficit

• 3. At present inflation and nominal interest rates are low and constant (so for this question, assume they are both zero and constant). Consider a country with a public debt to GDP ratio of 100 per cent, which the mainstream economists consider to be dangerously high. The mainstream prescription is to run primary fiscal surpluses to stabilise and then reduce the debt ratio. Under the circumstances given, this strategy will only work if there is real GDP growth.

Answer: False