Quiz #77

• 1 The IMF and the OECD equate the Non-Accelerating Inflation Rate of Unemployment (NAIRU) with their concept of full employment and they use the NAIRU to calibrate their structural deficit estimates. Accordingly, the structural deficits will typically be:
• difficult to assess because their forecasts are subject to forecasting inaccuracy.
• biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.
• biased downwards thus indicating, at any point in the business cycle, that the government fiscal stance is less expansionary than it actually is.
• 2. Rising public debt levels at constant interest rates increase the volume of interest servicing payments that have to be made. For a sovereign nation entrenched in recession, these payments will:
• reduce the room $-for-$ for other non-inflationary discretionary deficit spending because they will "fill up the spending gap" more quickly.
• reduce the capacity of the private sector to save because they will require cuts backs in the deficit to support the repayments.
• not reduce the room $-for-$ for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".
• 3. Under a fiat monetary system, the absence of currency convertibility means:
• there is no reason for people to hold currency as a hedge against gold price falls.
• that the government can motivate people to exchange goods and services in return for public spending by fining anyone of working age who walks down the street.
• that the currency is only convertible into government bonds rather than gold.
• 4. When a sovereign government issues debt it logically:
• increases the assets that are held by the non-government sector $-for-$.
• has no impact on the overall holdings of assets held by the non-government sector $-for-$.
• reduces the capacity of the private sector to borrow from banks because they use their deposits to buy the bonds.
• 5. Only one of the following statements can be true when you observe rising government bond yields for new issues:
• Government spending is becoming more expensive.
• Bond prices are falling in response to demand.
• Government spending is increasing the cost of borrowing for private investors.

Quiz #77 answers

• 1 The IMF and the OECD equate the Non-Accelerating Inflation Rate of Unemployment (NAIRU) with their concept of full employment and they use the NAIRU to calibrate their structural deficit estimates. Accordingly, the structural deficits will typically be:

Answer: biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.

• 2. Rising public debt levels at constant interest rates increase the volume of interest servicing payments that have to be made. For a sovereign nation entrenched in recession, these payments will:

Answer: not reduce the room $-for-$ for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".

• 3. Under a fiat monetary system, the absence of currency convertibility means:

Answer: that the government can motivate people to exchange goods and services in return for public spending by fining anyone of working age who walks down the street.

• 4. When a sovereign government issues debt it logically:

Answer: has no impact on the overall holdings of assets held by the non-government sector $-for-$.

• 5. Only one of the following statements can be true when you observe rising government bond yields for new issues:

Answer: Bond prices are falling in response to demand.