Quiz #90

• 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:
• biased downwards thus indicating, at any point in the business cycle, that the government fiscal stance is less expansionary than it actually is.
• biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.
• difficult to assess because their forecasts are subject to forecasting inaccuracy.
• 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:
• 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".
• reduce the capacity of the private sector to save because they will require cuts backs in the deficit to support the repayments.
• reduce the room $-for-$ for other non-inflationary discretionary deficit spending because they will "fill up the spending gap" more quickly.
• 3. When a sovereign government issues debt it logically:
• increases the financial assets that are held by the non-government sector $-for-$.
• has no impact on the overall holdings of financial assets held by the non-government sector $-for-$.
• reduces the capacity of the private sector to borrow from banks because they use their deposits to buy the bonds.
• 4. Only one of the following statements is definitely true when you observe rising government bond yields for new issues:
• Government spending is becoming more expensive.
• Bond prices are falling in response to falling demand.
• Government spending is increasing the cost of borrowing for private investors.
• 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).
• True
• False
• Maybe

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