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The Weekend Quiz – February 1-2, 2020

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. When a national government announces its fiscal balance has moved 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).

2. If the external balance remains in surplus, then the national government can run a fiscal surplus without impeding economic growth.

3. 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). As a result of the recession, the government's fiscal balance, net of interest payments, goes into deficit equivalent to 1 per cent of GDP and the public debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and doubles the primary fiscal deficit relative to GDP, and, in doing so, stimulates aggregate demand such that 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 fiscal deficit because of the real growth in the economy.

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