Quiz #98

• 1. When a government such as the US government voluntarily constrains itself by issuing debt to match $-for-$ its net spending position (deficit), it reduces the funds available to the private sector for their own spending.
• True
• False
• 2. When the national government's budget balance moves into surplus:
• it is a sign that the government is trying to constrain economic activity.
• it is a sign that the government is worried that inflation is rising.
• you cannot conclude anything about the government's policy intentions.
• Options (a) and (b).
• 3. If the external balance remains in surplus, then the national government will not impede economic growth by running a budget surplus.
• False
• True
• 4. Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.
• False
• True
• 5. Premium question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The government's budget balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.
• True
• False
• Not enough information to make a conclusion

Quiz #98 answers

• 1. When a government such as the US government voluntarily constrains itself by issuing debt to match $-for-$ its net spending position (deficit), it reduces the funds available to the private sector for their own spending.

Answer: False

• 2. When the national government's budget balance moves into surplus:

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

• 3. If the external balance remains in surplus, then the national government will not impede economic growth by running a budget surplus.

Answer: False

• 4. Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.

Answer: False

• 5. Premium question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The inflation rate is subdued at 1 per cent per annum. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The government's budget balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.

Answer: False