Quiz #8

• 2. If the central bank offered no return on overnight bank reserves then
• running budget deficits would force banks to stop lending because they would not want non-performing reserves.
• running budget deficits would drive overnight interest rates down to zero.
• running budget deficits would drive interest rates up because it would create a scarcity of available loanable funds.
• 1. If the central bank set the interest rate to zero then
• there would be no incentive for banks to lend for housing.
• there would be a huge build up of private debt because credit would be cheap.
• investment rates would reflect risk.
• 3. It is inevitable that public debt will rise in Australia under current circumstances given
• that the federal government knows that it would create hyperinflation if it didn't drain the funds.
• that the federal government has voluntarily imposed a rule that it will match all net spending fully with market-based debt issues.
• that the federal government does not want to increase the overall tax take given the depth of the spending gap it is trying to fill.
• 4. The Australian economy has in net terms generated 62.2 thousand jobs since February 2008, but unemployment rate has risen from 3.9 per cent to its current 5.4 per cent. This is because
• the labour force has contracted in the face of the global financial crisis discouraging workers to look for work.
• the dole conditions are too generous and there is a disincentive to work.
• the federal government deficit has not been large enough over the period.
• 5. The largest reason why China has grown so fast in the period 2004-2008 has been
• its huge population which gives it such a large domestic market.
• the strength of its government spending.
• the strength of world demand for its exports.

Quiz #8 answers

• 2. If the central bank offered no return on overnight bank reserves then

Answer: running budget deficits would drive overnight interest rates down to zero.

Explanation: Please read The interest rate should be set to zero or post a comment for further discussion

• 1. If the central bank set the interest rate to zero then

Answer: investment rates would reflect risk.

Explanation: Please read Interest rates should be set to zeo or post a comment for further discussion

• 3. It is inevitable that public debt will rise in Australia under current circumstances given

Answer: that the federal government has voluntarily imposed a rule that it will match all net spending fully with market-based debt issues.

Explanation: Please read Federal budget 2009 - ignorance will drive bad policy or post a comment for further discussion

• 4. The Australian economy has in net terms generated 62.2 thousand jobs since February 2008, but unemployment rate has risen from 3.9 per cent to its current 5.4 per cent. This is because

Answer: the federal government deficit has not been large enough over the period.

Explanation: Please read A surprise every day employment rises! or post a comment for further discussion

• 5. The largest reason why China has grown so fast in the period 2004-2008 has been

Answer: the strength of its government spending.

Explanation: Please read Where the crisis means death! or post a comment for further discussion