Quiz #84 answers

• 1. Quite apart from whether they understand that they do not face any financial constraints, governments are now trying to reduce their budget deficits because they correctly understand that additional fiscal stimulus would increase the public debt ratios which would worsen their political positions.

Answer: False

• 2. The recent practice of large-scale quantitative easing (so-called printing money) in many nations and the fact that inflation is benign, strongly refutes the mainstream theory of inflation embodied in the Quantity Theory of Money, which claims that growth in the stock of money will be inflationary.

Answer: False

• 3. Bank lending is capital-constrained rather than reserve constrained. If the central bank forced banks to maintain a reserve ratio of 100 per cent then lending would also be reserve constrained.

Answer: False

• 4. In an endogenous money system, a central bank cannot reduce bank lending while maintaining its target monetary policy rate by increasing the rate that provides reserves to the commercial banks.

Answer: True

• 5. Premium Question: In the context of population ageing, the fact that a sovereign government is never financially constrained may become irrelevant in terms of their capacity to provide first-class health care and pensions given rising dependency ratios.

Answer: True