Quiz #670

• 1. Unlike a household which not only has to service its debt obligations over the course of the loan but also has to repay them at the due date, a national government, which issues its own currency can always roll over its "own currency" debt obligations and never has to pay them back.
• False
• True
• 2. Standing facilities that central banks maintain means that the monetary base always adjusts to the changes in the money supply.
• True
• False
• 3. Assume that the current account deficit of a nation is stable and equal to 2 per cent of GDP throughout a complete economic cycle. The government is imposing fiscal austerity and at a particular point over that cycle we observe a government surplus equal to 3 per cent of GDP but which over the complete economic cycle will end up being balanced. We also would know two things about the private domestic sector balance - at the observation point and on average over the cycle. It would be in:
• (a) deficit by 5 per cent of GDP but on average over the cycle in surplus equal to 2 per cent of GDP.
• (b) deficit by 5 per cent of GDP but on average over the cycle in deficit equal to 2 per cent of GDP.
• (c) deficit by 1 per cent of GDP but on average over the cycle in surplus equal to 2 per cent of GDP.
• (d) deficit by 1 per cent of GDP but on average over the cycle in deficit equal to 2 per cent of GDP.

Quiz #670 answers

• 1. Unlike a household which not only has to service its debt obligations over the course of the loan but also has to repay them at the due date, a national government, which issues its own currency can always roll over its "own currency" debt obligations and never has to pay them back.

Answer: False

• 2. Standing facilities that central banks maintain means that the monetary base always adjusts to the changes in the money supply.

Answer: True

• 3. Assume that the current account deficit of a nation is stable and equal to 2 per cent of GDP throughout a complete economic cycle. The government is imposing fiscal austerity and at a particular point over that cycle we observe a government surplus equal to 3 per cent of GDP but which over the complete economic cycle will end up being balanced. We also would know two things about the private domestic sector balance - at the observation point and on average over the cycle. It would be in:

Answer: (b) deficit by 5 per cent of GDP but on average over the cycle in deficit equal to 2 per cent of GDP.