Quiz #54 answers

• 1. Greece would have to undergo a period of austerity even if the Greek government left the EMU, restored its currency and renegotiated all Euro debts into the drachma (that is, defaulted). This is because investors would be reluctant to purchase Greek government debt and they would have to reduce their net spending accordingly.

Answer: False

• 2. If policy makers use the NAIRU to compute the decomposition between structural and cyclical budget balances, then if the estimated NAIRU is above the true full employment unemployment rate, the estimated impact of the automatic stabilisers will always be biased downwards.

Answer: True

• 3. The fact that large scale quantitative easing conducted by central banks in Japan in 2001 and now in the UK and the USA has not caused inflation provides a strong refutation of the mainstream Quantity Theory of Money, which claims that growth in the stock of money will be inflationary.

Answer: False

• 4. The central bank could always use quantitative easing to control interest rates at any maturity along the yield curve if it desired. The only thing stopping it are political constraints.

Answer: False

• 5. Central bank balance sheet management aimed at controlling the yields on public debt at all maturities may not have much impact on the term structure during periods of high inflation.

Answer: True