Quiz #7

• 1. Among the Australian Government debts are Benchmark Treasury Fixed Coupon Bonds on issue. There are about $A61 billion outstanding and maturing at various dates. Around $A6 billion of them mature in September 2009 and the coupon value (interest rate) is 7.5 per cent. So although the government is not financially constrained
• it is not true that the debt has to be paid back because the government can spend whenever it likes.
• it remains true that the debt has to be paid back but this does not require any trade-off between debt servicing and other public projects.
• it remains true that the debt has to be paid back and so the government will have to choose which projects have to be sacrificed to service the debt.
• 2. There is talk that the international ratings agencies may reduce the Australian Government's triple A bond rating if the deficit gets too large which may see higher short-term interest rates. If this occurs then we can
• legitimately conclude that the rising deficit has caused borrowing costs to rise.
• legitimately conclude that the ratings agencies do not understand that the government is not financially constrained.
• legitimately conclude that the central bank has tightened monetary policy.
• 3. The Federal Government has announced a number of major infrastructure projects that it intends to fund (for example, its broadband plan and its defence plan). Their ability to implement these plans depends on
• the availability of real resources suitable for use.
• the economy improving such that the automatic stabilisers increase tax revenue.
• the bond markets continuing to purchase government bonds.
• 4. The rising unemployment in Australia at present
• is due to international economic events associated with the global financial crisis.
• is due to the inadequate skills that the unemployed possess.
• is due to the Federal budget deficit not being large enough relative to GDP.
• 5. Higher government deficits may drive up interest rates if bond markets begin to get short of funds. This statement is false
• because interest rates are set in the private market and government debt has no real risk.
• because in modern monetary theory the government does not have a financial constraint.
• because the supply of treasury securities offered by the federal government is always equal to the newly created funds from the deficit.

Quiz #7 answers

• 1. Among the Australian Government debts are Benchmark Treasury Fixed Coupon Bonds on issue. There are about $A61 billion outstanding and maturing at various dates. Around $A6 billion of them mature in September 2009 and the coupon value (interest rate) is 7.5 per cent. So although the government is not financially constrained

Answer: it remains true that the debt has to be paid back but this does not require any trade-off between debt servicing and other public projects.

Explanation: Please read Lucky he's not Treasurer anymore or post a comment for further discussion

• 2. There is talk that the international ratings agencies may reduce the Australian Government's triple A bond rating if the deficit gets too large which may see higher short-term interest rates. If this occurs then we can

Answer: legitimately conclude that the central bank has tightened monetary policy.

Explanation: Please read Ratings agencies and higher interest rates or post a comment for further discussion

• 3. The Federal Government has announced a number of major infrastructure projects that it intends to fund (for example, its broadband plan and its defence plan). Their ability to implement these plans depends on

Answer: the availability of real resources suitable for use.

Explanation: Please read Lucky he's not Treasurer anymore or post a comment for further discussion

• 4. The rising unemployment in Australia at present

Answer: is due to the Federal budget deficit not being large enough relative to GDP.

Explanation: Please read The OECD is at it again! or post a comment for further discussion

• 5. Higher government deficits may drive up interest rates if bond markets begin to get short of funds. This statement is false

Answer: because the supply of treasury securities offered by the federal government is always equal to the newly created funds from the deficit.

Explanation: Please read Lucky he's not Treasurer anymore or post a comment for further discussion