Quiz #78 answers

• 1. The stronger is the the demand for public bonds at a government auction

Answer: the lower the yields will be at that asset maturity but this tells us nothing about the effect of budget deficits on short-term interest rates

• 2. A sovereign government voluntarily issues debt to the private sector to match its spending. The more public debt it issues

Answer: the greater is non-government wealth held in the form of public debt.

• 3. When the government pays back funds that is has borrowed from the non-government sector the payments may

Answer: be inflationary if the government payments to bond holders at maturity add more to nominal aggregate demand than the real economy can support given other policy settings.

• 4. When an external deficit and public deficit coincide, there must be a private sector deficit. This suggests that governments can only run budget deficits safely to support a private sector surplus, when net exports are strong.

Answer: False

• 5. When the private domestic sector decides to lift its saving ratio we cannot conclude that the national government has to increase its net spending (deficit) to avoid employment losses.

Answer: True