Quiz #9

• 1. The US Government has predicted a national deficit of 12.9 per cent of gross domestic product by September 30 and rising. In Tuesday's Budget it was estimated that the Australian Government deficit to GDP ratio would be around 4.9 per cent in the coming fiscal year. The difference arises because
• the US economy is larger than the Australian economy.
• the spending gap is higher in the US.
• the overall US Government budget is providing more stimulus than the Australian budget.
• 2. While it is true that the federal government is not revenue-constrained, the fact that it voluntarily issues debt every time it net spends
• means that ultimately the deficit will match the spending gap.
• means that the government is wanting to provide the private sector with risk free wealth.
• means that for all intents and purposes it is acting like a household who faces a budget constraint.
• 3. The fact that the federal government has to pay back its debt
• means that it is ultimately revenue-constrained despite being the issuer of the currency.
• means that the government has entered a legal contract to repay the debt.
• means that the deficit will ultimately be inflationary.
• 4. If the structural budget balance is in surplus but the overall budget is in deficit
• then we know that the automatic stabilisers are not working properly.
• then we know that the government is relaxing its policy stance to stimulate economic activity.
• then we know that the government policy stance is contractionary.
• 5. When the budget balance moves into deficit
• you cannot conclude anything about the federal government's intentions.
• it is a sign that the federal government is trying to stimulate the economy.
• it is a sign that the federal government is worried that unemployment is rising.

Quiz #9 answers

• 1. The US Government has predicted a national deficit of 12.9 per cent of gross domestic product by September 30 and rising. In Tuesday's Budget it was estimated that the Australian Government deficit to GDP ratio would be around 4.9 per cent in the coming fiscal year. The difference arises because

Answer: the overall US Government budget is providing more stimulus than the Australian budget.

Explanation: Please read The size of the deficit should not be the focus or post a comment for further discussion

• 2. While it is true that the federal government is not revenue-constrained, the fact that it voluntarily issues debt every time it net spends

Answer: means that for all intents and purposes it is acting like a household who faces a budget constraint.

Explanation: Please read The size of the deficit should not be the focus or post a comment for further discussion

• 3. The fact that the federal government has to pay back its debt

Answer: means that the government has entered a legal contract to repay the debt.

Explanation: Please read Flat Earth theory returns - budget aftermath or post a comment for further discussion

• 4. If the structural budget balance is in surplus but the overall budget is in deficit

Answer: then we know that the government policy stance is contractionary.

Explanation: Please read Structural deficits - the great con job! or post a comment for further discussion

• 5. When the budget balance moves into deficit

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

Explanation: Please read The deficit and debt debate or post a comment for further discussion.