Quiz #674

• 1. A nation that issues its own currency and floats it on international foreign exchange markets faces no solvency risk with respect to the debt it issues.
• False
• True
• 2. By investing fiscal surpluses in a sovereign fund a government creates more space for non-inflationary public spending in the future.
• False
• True
• 3. Consider a government that increases spending by $100 billion in the each of the next three years. Economists estimate the spending multiplier (which is the multiple by which income increases for a given injection of spending) to be 1.5 and the impact is immediate and exhausted in each year. They also estimate that the import propensity is 0.2 (meaning that imports rise by 20 cents for every dollar generated in the economy). They also estimate the tax multiplier (impact of tax changes on income) to be equal to 1 and the current tax rate is equal to 30 per cent. So for every extra dollar produced, tax revenue rises by 30 cents. Which of the following statements is correct? The cumulative impact of this fiscal expansion on nominal GDP is:
• $450 billion and the private sector saves 24 cents out of every extra dollar generated.
• $450 billion and the private sector saves 28 cents out of every extra dollar generated.
• $315 billion and the private sector saves 24 cents out of every extra dollar generated.
• $315 billion and the private sector saves 28 cents out of every extra dollar generated.

Quiz #674 answers

• 1. A nation that issues its own currency and floats it on international foreign exchange markets faces no solvency risk with respect to the debt it issues.

Answer: False

• 2. By investing fiscal surpluses in a sovereign fund a government creates more space for non-inflationary public spending in the future.

Answer: False

• 3. Consider a government that increases spending by $100 billion in the each of the next three years. Economists estimate the spending multiplier (which is the multiple by which income increases for a given injection of spending) to be 1.5 and the impact is immediate and exhausted in each year. They also estimate that the import propensity is 0.2 (meaning that imports rise by 20 cents for every dollar generated in the economy). They also estimate the tax multiplier (impact of tax changes on income) to be equal to 1 and the current tax rate is equal to 30 per cent. So for every extra dollar produced, tax revenue rises by 30 cents. Which of the following statements is correct? The cumulative impact of this fiscal expansion on nominal GDP is:

Answer: $450 billion and the private sector saves 24 cents out of every extra dollar generated.