1. Start from a situation where the external surplus is the equivalent of 2 per cent of GDP and the fiscal surplus is 2 per cent. If the fiscal balance stays constant and the external surplus rises to the equivalent of 4 per cent of GDP then:

National income rises and the private domestic surplus moves from 4 per cent of GDP to 6 per cent of GDP.
National income remains unchanged and the private domestic surplus moves from 4 per cent of GDP to 6 per cent of GDP.
National income falls and the private domestic surplus moves from 4 per cent of GDP to 6 per cent of GDP.
National income rises and the private domestic surplus moves from 0 per cent of GDP to 2 per cent of GDP.
National income remains unchanged and the private domestic surplus moves from 0 per cent of GDP to 2 per cent of GDP.
National income falls and the private domestic surplus moves from 0 per cent of GDP to 2 per cent of GDP.

2. A rising fiscal deficit indicates that discretionary fiscal policy is expansionary.

3. Matching government deficit spending with bond issues is less expansionary than if the government instructed the central bank to buy its bonds to match the deficit.