Quiz #529
- 1. In a fixed coupon government bond auction, the higher is the demand for the bonds:
- 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
- the lower the yields will be at that asset maturity which suggests that higher fiscal deficits will eventually drive short-term interest rates down
- the higher the yields will be at that asset maturity which suggests that higher fiscal deficits will eventually drive short-term interest rates down
- 2. When the government borrows from the non-government sector it eventually has to pay the bonds back on maturity. This will:
- not be inflationary because the sovereign government just has to credit the bank accounts of those who hold the bonds to repay them.
- 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.
- be inflationary if by the time the bonds mature the economy is growing strongly so there will be too much money floating about.
- 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.
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