Quiz #59 answers

• 1. Under current institutional arrangements, the change in the ratio of public debt to GDP will exactly equal the primary deficit plus the interest service payments on the outstanding stock of debt both expressed as ratios to GDP.

Answer: True

• 2. The public debt ratio will always fall when economic growth is positive because the primary deficit falls due to the automatic stabilisers (more tax revenue, less welfare spending) and the denominator GDP rises.

Answer: False

• 3. It would be impossible for the Reserve Bank of Australia to directly purchase Australian Treasury debt to facilitate the federal government's budget deficit while still targeting its policy rate of 4.5 per cent.

Answer: Maybe

• 4. One important lesson to be drawn from Modern Monetary Theory (MMT), which is overlooked in the public call for austerity programs, is that when economic growth resumes, the automatic stabilisers work in a counter-cyclical fashion and ensure that the government budget balance returns to its appropriate level.

Answer: False

• 5. The money multiplier concept suggests that changes in the monetary base are transmitted by commercial bank lending in multiplied changes in the money supply. The fact is that in a modern monetary economy the monetary base adjusts to the changes in the money supply.

Answer: True