Quiz #63

• 1. In a fixed coupon government bond auction, the higher is the demand for the bonds
• 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
• the lower the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down
• the higher the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down
• 2. A sovereign government does not have to issue debt to finance its spending. But the more public debt it voluntarily issues
• the greater is non-government wealth held in the form of public debt.
• the less is the volume of investment funds in the non-government sector that can be used for other investments.
• the more difficult it is for banks to attract deposits to initiate loans from.
• 3. When the government borrows from the non-government sector it eventually has to pay the bonds back on maturity. This will
• not be inflationary because the sovereign government just has to credit the bank accounts of those who hold the bonds to repay them.
• 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.
• be inflationary if by the time the bonds mature the economy is growing strongly so there will be too much money floating about.
• 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.
• True
• False
• Maybe
• 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.
• Maybe
• False
• True

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