Quiz #63 answers

• 1. In a fixed coupon government bond auction, the higher is the demand for the bonds

Answer: the lower the yields will be at that asset maturity but this tells us nothing about the effect of budget deficits on short-term interest rates

• 2. A sovereign government does not have to issue debt to finance its spending. But the more public debt it voluntarily issues

Answer: the greater is non-government wealth held in the form of public debt.

• 3. When the government borrows from the non-government sector it eventually has to pay the bonds back on maturity. This will

Answer: be inflationary if the government payments to bond holders at maturity add more to nominal aggregate demand than the real economy can support given other policy settings.

• 5. In a situation where the private domestic sector decides to lift its saving ratio we cannot conclude that the national government has to increase its net spending (deficit) to avoid employment losses.

Answer: True

• 4. When an external deficit and public deficit coincide, there must be a private sector deficit, which means that governments can only really run budget deficits safely to support a private sector surplus, when net exports are strong.

Answer: False