Quiz #66 answers

• 1. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.

Answer: True

• 2. Bank reserves are maintained to ensure that all the cheques written every day clear when presented. If a bank doesn't have enough reserves then cheques drawn against it will bounce.

Answer: False

• 3. While a sovereign government is not revenue constrained and voluntarily constrains itself to borrow to cover its net spending position, it remains the case that by substituting its spending for the borrowed funds it reduces the private capacity to borrow and spend.

Answer: False

• 4. The crucial difference between a monetary system based on the gold standard world and a fiat currency monetary is:

Answer: that under the former system, the national government had to issue debt to cover spending above taxation.

• 5. When the national government's budget balance moves into deficit:

Answer: you cannot conclude anything about the government's policy intentions.