Quiz #87 answers

• 1. A nation that has a strong terms of trade (and external surplus) is able to run a budget surplus without necessarily forcing the private domestic sector into deficit. It is sensible under these conditions to invest the surpluses in a sovereign fund which creates more space for non-inflationary public spending in the future.

Answer: False

• 2. A sovereign national government, that is, one that issues its own floating currency faces no solvency risk with respect to the debt it issues.

Answer: Maybe

• 3. Under current institutional arrangements, the change in the ratio of public debt to GDP will exactly equal the primary deficit plus the interest service payments on the outstanding stock of debt both expressed as ratios to GDP minus the changes in the monetary base arising from official foreign exchange transactions conducted by the central bank.

Answer: False

• 4. It would be impossible for a central bank to directly purchase treasury debt to facilitate the national governments budget deficit (that is, "monetise the deficit") while still targeting a positive short-term policy rate.

Answer: False

• 5. Premium Question: Assume the government increases spending by $100 billion in the each of the next three years from now. Economists estimate the spending multiplier (which is the multiple by which income increases for a given injection of spending) to be 1.5 and the impact is immediate and exhausted in each year. They also estimate that the import propensity is 0.2 (meaning that imports rise by 20 cents for every dollar generated in the economy). They also estimate the tax multiplier (impact of tax changes on income) to be equal to 1 and the current tax rate is equal to 30 per cent. So for every extra dollar produced, tax revenue rises by 30 cents. Which of the following statements is correct?

Answer: The cumulative impact of this fiscal expansion on nominal GDP is $450 billion and the private sector saves 24 cents out of every extra dollar generated.