Saturday Quiz – November 24, 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. A fiscal rule that forces governments to run budget surpluses each year would equally force the private sector to run deficits and accumulate increasing levels of indebtedness as a result.

2. If a government is running an austerity program and learns that the estimated output gap was smaller than they originally thought, then other things equal, the government’s discretionary fiscal austerity would have to be intensified to balance the structural budget.

3. When the private domestic sector decides to save more of its total income, the national government has to increase its net spending (deficit) to avoid output and employment losses.

4 In a fixed coupon government bond auction, the higher is the demand for the bonds the lower the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down.

5. Premium Question: Opponents of continuous budget deficits often agree that a short-period of deficit spending when the private demand is weak is not likely to be inflationary. Their main concern is that it is the accumulated stock of spending associated with continuous budget deficits that eventually increases the risk of inflation. Their concern has validity because if nominal spending growth outstrips the capacity of the economy to respond in real terms, then inflation will be the result.

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