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.
- 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.