Quiz #99 answers

• 1. The central bank can influence the supply of money via the price it provides reserves to the commercial banks but this influence is compromised by the level at which it sets the target monetary policy rate.

Answer: True

• 2. If the private domestic sector spends less than it earns and the nation runs a small external deficit, then the government budget will always be in deficit at all levels of national income.

Answer: True

• 3. Under current institutional arrangements, a central bank can easily purchase treasury debt directly to satisfy accounting arrangements relating to the national governments budget deficit (that is, "monetise the deficit") while still targeting a positive short-term policy rate.

Answer: True

• 4. In a stock-flow consistent macroeconomics, we know that flows during a period add to relevant stocks at the end of the period. Accordingly, government spending and private consumption spending are two examples of spending flows that add to the stock of aggregate demand which in turn impacts on Gross Domestic Product (National Income) because spending equals income.

Answer: False

• 5. Premium question: Assume the current public debt to GDP ratio is 100 per cent and that central banks keep nominal interest rates and inflation constant and zero. Governments that promote fiscal austerity claim they can reduce the the public debt to GDP ratio by pushing the primary budget into surplus even if the public spending contraction creates a negative real GDP growth rate. Under the circumstances outlined, this claim is correct.

Answer: True