1. If we assume that inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting then if government spending increases by $X dollars and private investment and exports are unchanged nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by more than $X dollars because of the multiplier.

Answer: False

2. When a government such as the US government voluntarily constrains itself to borrow to cover its net spending position, it substitutes its spending for the borrowed funds and logically reduces the private capacity to borrow and spend.

Answer: False

Answer: you cannot conclude anything about the government's policy intentions.

4. The crucial difference between a monetary system based on the convertible currency backed by gold and a fiat currency monetary is:

Answer: that under the former system, the national government had to issue debt to cover spending above taxation.

5. This is the premium question for this week: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The government's budget balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.

Answer: False