Quiz #575 answers

• 1. Only one of the following propositions is possible (with all balances expressed as a per cent of GDP):

Answer: A nation can run an external deficit with an offsetting fiscal surplus, while the private domestic sector is spending more than they are earning.

• 2. It won't be long before the European Commission demands that Eurozone nations are forced to pursue internal devaluation through austerity programs that are designed to deflate nominal wages and prices to allegedly improve their relative competitiveness. Ignoring whether the logic is correct or not, which of the following propositions must also follow within the internal devaluation logic:

Answer: If wages and prices fall at the same rate, then labour productivity has to rise and what happens to employment is irrelevant.

• 3. One possible problem with running continuous fiscal deficits is that the spending builds up over time and with inflation eventually becoming the risk that has to be managed.

Answer: False