Quiz #609

• 1. Assuming the expenditure multiplier is greater than 1, if the government increases its deficit, the net spending injection will have a greatest impact on aggregate spending if there are no offsetting monetary operations by the central bank (government bond sales) draining the excess reserves created.
• False
• True
• 2. If the government achieves its aim of reducing its fiscal deficit by say $10 billion, the net financial assets destroyed by this withdrawal could be replaced by the central bank engaging in a $10 billion quantitative easing program.
• False
• True
• 3. Which government deficit outcome is the most expansionary?
• 1 per cent of GDP.
• 2 per cent of GDP.
• 3 per cent of GDP.
• Cannot tell because it depends on the decomposition of the structural and cyclical components.

Quiz #609 answers

• 1. Assuming the expenditure multiplier is greater than 1, if the government increases its deficit, the net spending injection will have a greatest impact on aggregate spending if there are no offsetting monetary operations by the central bank (government bond sales) draining the excess reserves created.

Answer: False

• 2. If the government achieves its aim of reducing its fiscal deficit by say $10 billion, the net financial assets destroyed by this withdrawal could be replaced by the central bank engaging in a $10 billion quantitative easing program.

Answer: False

• 3. Which government deficit outcome is the most expansionary?

Answer: 3 per cent of GDP.