The Weekend Quiz – February 20-21, 2021

1. Central banks provide reserves to the commercial banking system usually at some penalty rate. However, this compromises their capacity to target a given monetary policy rate.

2. If the real interest rate (difference between nominal interest rate and inflation) is constant, then a currency-issuing government, which matches its net spending $-for-$ with debt issuance, could double its fiscal deficit without pushing up the public debt ratio.

3. Assume that inflation is stable, there is excess productive capacity, and the central bank maintains its current interest rate target. If on average the government collects an income tax of 20 cents in the dollar, then total tax revenue will rise by 0.20 times $x if government spending increases (once and for all) by $X dollars and private investment and exports remain unchanged.