Quiz #90 answers

• 1. The IMF and the OECD equate the Non-Accelerating Inflation Rate of Unemployment (NAIRU) with their concept of full employment and they use the NAIRU to calibrate their structural deficit estimates. Accordingly, the structural deficits will typically be:

Answer: biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.

• 2. Rising public debt levels at constant interest rates increase the volume of interest servicing payments that have to be made. For a sovereign nation entrenched in recession, these payments will:

Answer: not reduce the room $-for-$ for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".

• 3. When a sovereign government issues debt it logically:

Answer: has no impact on the overall holdings of financial assets held by the non-government sector $-for-$.

• 4. Only one of the following statements is definitely true when you observe rising government bond yields for new issues:

Answer: Bond prices are falling in response to falling demand.

• 5. Premium question: Open market operations as a means of ensuring that levels of bank reserves are consistent with the policy target becomes redundant if the central bank pays a positive interest rate on overnight reserves held by the commercial banks (ignore any reserve requirements in place when answering).

Answer: Maybe