Quiz #71 answers

• 1. The policy direction of some EMU nations to resolve their so-called fiscal crisis is to reduce wages and prices in order to restore competitiveness. While harsh this will ultimately improve the competitive position of Greece, Portugal, Ireland and other nations currently in external deficit by increasing aggregate demand via net exports.

Answer: False

• 2. At present, bank lending is capital-constrained rather than reserve constrained. If the central bank forced banks to maintain a reserve ratio of 100 per cent then lending would also be reserve constrained.

Answer: False

• 3. A central bank can reduce bank lending while maintaining its target monetary policy rate by increasing the rate that provides reserves to the commercial banks.

Answer: False

• 4. A national government that issues its own currency is not revenue-constrained. However, inflation may render it impossible for the government to use budgetary policy to meet the nominal demands for pensions and health care by an increasing proportion of the population.

Answer: True

• 5. The growth of bank reserves and the growth in the stock of money have followed a similar path in the recent crisis which signifies that credit creation has been tightly constrained by the recession.

Answer: True