Quiz #529 answers

• 1. In a fixed coupon government bond auction, the higher is the demand for the bonds:

Answer: the lower the yields will be at that asset maturity but this tells us nothing about the effect of fiscal deficits on short-term interest rates

• 2. When the government borrows from the non-government sector it eventually has to pay the bonds back on maturity. This will:

Answer: be inflationary if the government payments to bond holders at maturity add more to nominal aggregate demand than the real economy can support given other policy settings.

• 3. When an external deficit and public deficit coincide, there must be a private sector deficit, which means that governments can only really run fiscal deficits to support a private sector surplus, when net exports are strong.

Answer: False