1. Some mainstream economists claim that a public debt ratio of 80 per cent is a dangerous threshold that should not be passed. Accordingly, governments should run primary surpluses (taxation revenue in excess of non-interest government spending) to keep the ratio below the threshold. Modern monetary theory tells us that while a currency-issuing government running a deficit can never reduce the debt ratio it doesn't matter anyway because such a government faces no risk of insolvency.
Answer: False
2. Imagine that macroeconomic policy is geared towards keeping real GDP growth on trend. Assume this rate of growth is 3 per cent per annum. If labour productivity is growing at 2 per cent per annum and the labour force is growing at 1.5 per cent per annum and the average working week is constant in hours, then this policy regime will result in
Answer: a rising unemployment rate
3. Students are taught that the macroeconomic income determination system can be thought of as a bath tub with the current GDP being the water level. The drain plug can be thought of as saving, imports and taxation payments (the so-called leakages from the expenditure system) while the taps can be thought of as investment, government spending and exports (the so-called exogenous injections into the spending system). This analogy is valid because GDP will be unchanged as long as the flows into the bath are equal to the flows out of it which is tantamount to saying the the spending gap left by the leakages is always filled by the injections.