Quiz #60 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 a current account deficit with an offsetting government sector surplus, while the private domestic sector is spending more than they are earning.

• 2. If the Greek government decided to leave the EMU and restore their own currency they would have no solvency problems and could avoid an austerity program.

Answer: False

• 3. The IMF claims that "Greece needs to rely on internal devaluation" and the austerity programs are designed to deflate nominal wages and prices which is claimed will make the economy more competitive as long as real unit labour costs fall faster than their trading partners. However, ignoring whether the logic is correct or not, which of the following propositions must also follow if the IMF logic is to follow:

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

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

Answer: False

• 5. One of the reasons, mainstream economists argue for lower taxes is that they believe they distort the allocation of resources by changing the rates of return on different uses of capital (and labour). In the 2010-11 Australian Federal Budget, the Australian government introduced a Resource Super Profits Tax on mining companies as a way of sharing the gains made from excess mining profits across all Australians. Leaving aside the arguments that the government does not need revenue to spend, a typical mainstream economist would conclude that this tax will reduce mining investment.

Answer: False