Quiz #75 answers

• 1. The money multiplier suggests that changes in the monetary base are driven by changes in the money supply

Answer: False

• 2. When economic growth resumes the automatic stabilisers work in a counter-cyclical fashion and ensure that the government budget balance returns to its appropriate level.

Answer: Maybe

• 3. One possible problem with running continuous budget deficits is that the spending builds up over time and with inflation eventually becoming the risk that has to be managed.

Answer: False

• 4. Only one of the following propositions is possible (with all balances expressed as a per cent of GDP):

Answer: A nation can run a current account deficit accompanied by a government sector surplus of equal proportion to GDP, while the private domestic sector is spending more than they are earning.

• 5. The IMF and the European leaders all claim that Eurozone nations need to rely on internal devaluation to restore growth and so the austerity programs are designed to deflate nominal wages and prices. It is claimed that for each individual economy this strategy will render it more competitive as long as real unit labour costs fall faster than their trading partners. However, ignoring whether the logic is correct or not, which of the following propositions must also follow if the logic is to follow:

Answer: If wages and prices fall at the same rate, then labour productivity has to rise and what happens to employment is irrelevant.