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Saturday Quiz – September 15, 2012

Welcome to the Billy Blog Saturday Quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.

1. National accounting rules dictate that a national government surplus equals a non-government deficit (and vice-versa). If a national government successfully achieves a budget surplus through an austerity program then the private domestic sector must be spending more than it is earning.

2. If the stock of aggregate demand exceeds the capacity of the productive sector to respond by producing extra real goods and services then inflation is inevitable.

3. If a nation is running a current account deficit and the private domestic sector is saving overall, then national income adjustments will ensure the government budget is in surplus.

4. A central bank cannot simultaneously debt monetise a budget deficit (buy debt from the treasury) and maintain a positive short-term policy rate.

5. Premium Question: Assume that the government increases spending by $100 billion at the start of each year and maintains this policy for the next three years from now. Economists estimate the spending multiplier to be 2 and the impact is exhausted within each year (all induced consumption is completed within 12 months). The tax multiplier is estimated to be equal to 1 and the current average tax rate is equal to 25 per cent (so tax revenue rises by 25 cents for every extra dollar of GDP produced ). What is the cumulative impact of this fiscal expansion on GDP after three years?

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    This Post Has 2 Comments
    1. Bill, in question 4 you define debt monetization as the central bank selling debt to the treasury, isn’t monetization when the central bank buys debt from the treasury?
      Thanks, David

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