Question 1

The difference between the official and correct measures of the deficit will be greater:

Accepted Answer

As the level of debt increases, there is a higher likelihood that the government will use accounting techniques to manipulate the deficit figures. This can result in a larger discrepancy between the official and correct measures of the deficit.

Question 2

The official measure of the deficit becomes more inaccurate as:

Accepted Answer

The official measure of the deficit becomes more inaccurate as the inflation rate rises. This is because inflation erodes the value of money over time, making nominal deficit figures less reflective of the true economic impact or purchasing power of the deficit. Higher inflation can distort the real value of government borrowing and spending, leading to inaccuracies in the reported deficit figures.

Question 3

Seignorage is defined as which of the following?

Accepted Answer

Seignorage refers to the revenue or profit earned by the government through the creation of money. It is basically the difference between the cost of producing money and the face value of the money. Therefore, the correct option is D which describes revenue from money creation.

Question 4

Which of the following is common to all hyperinflations?

Accepted Answer

High budget deficits are a common feature of hyperinflations as governments often resort to printing money to finance their spending. This leads to an increase in the money supply, which in turn reduces the value of the currency and causes hyperinflation. High trade deficits, liquidity traps, credible monetary policy, and disinflation are not necessarily common to all hyperinflations.

Question 5

All else equal, a rise in the debt- to- GDP ratio implies:

Accepted Answer

A rise in the debt-to-GDP ratio implies all of the mentioned outcomes: a greater surplus is needed to stabilize the ratio, there's a greater difference between official and correct deficit measures relative to GDP, and the ratio of interest payments to GDP increases.

Question 6

In virtually all hyperinflations, rapid money growth begins to occur because of:

Accepted Answer

In virtually all hyperinflations, rapid money growth begins to occur because of large and/or growing budget deficits. This is because governments typically increase spending to an unsustainable level, leading to a higher demand for money and therefore inflation.

Question 7

To reduce distortions in the economy, it is probably better to finance temporary large government spending with:

Accepted Answer

Financing temporary large government spending with deficits is often considered a better option to reduce distortions in the economy because it spreads the cost over time, avoiding immediate tax increases or the sale of national assets, which can have more immediate and potentially negative impacts on the economy. Deficits allow the government to borrow against future income, smoothing out the economic impact.

Question 8

The effect of changes in economic activity on the budget deficit is called:

Accepted Answer

Changes in economic activity can have a direct impact on government revenues and expenditures, which can in turn affect the budget deficit. Automatic stabilizers are mechanisms built into a country's fiscal policy that help to stabilize economic fluctuations by automatically adjusting government spending and taxation in response to changes in economic activity. These stabilizers help to mitigate the impact of economic shocks on the budget deficit.

Question 9

Debt monetisation occurs when:

Accepted Answer

Debt monetisation refers to the financing of a budget deficit through the creation of new money by the central bank. This is done by the government selling bonds to the central bank, which in turn creates new money to purchase these bonds. This can lead to inflationary pressures in the economy.

Question 10

If the government runs a primary deficit in year zero of B0, and, in year 1, decides to stabilise the debt (i.e., prevent the deficit from rising any further), then in year 1 and beyond, it must run a primary surplus equal to:

Accepted Answer

In order to stabilize the debt, the government needs to ensure that the primary deficit (B0) is not added to the existing debt. This means that the government needs to balance its budget at least for the primary expenditure (i.e., excluding interest payments) in year 1 and beyond. However, the government still needs to make interest payments on the existing debt, which requires a primary surplus equal to r times the existing debt. Therefore, the government needs to run a primary surplus equal to rB0 to stabilize the debt.

Question 11

Given nominal money growth, the amount of seignorage will be greater when:

Accepted Answer

Seignorage is the revenue generated from printing money. It is greater when real money balances are larger because the government can issue more money without causing excessive inflation, thus generating more revenue.

Question 12

The debt ratio will increase by more in any given year when:

Accepted Answer

The debt ratio will increase by more in any given year when the initial debt ratio is greater. This is because the interest payments on a larger debt balance will contribute more to the increase in the debt ratio compared to a smaller initial debt balance.

Question 13

The most extreme hyperinflation of the 20th century occurred in:

Accepted Answer

The most extreme hyperinflation of the 20th century occurred in Europe, specifically in Germany in the early 1920s, and in Hungary post World War II.

Question 14

In the 20th century, the most extreme episodes of hyperinflation in Europe occurred between:

Accepted Answer

The most extreme episodes of hyperinflation in Europe occurred between 1920 and 1946, including the German hyperinflation of the 1920s and the Hungarian hyperinflation of the 1940s. The other time periods listed did not see hyperinflation on the same scale as in the 1920s and 1940s.

Question 15

If the government runs a primary deficit in year zero of B0, and decides to repay it in year t (i.e., bring the debt back down to its pre- existing level), then in year t it must run a primary surplus equal to:

Accepted Answer

To repay the primary deficit of B0 in year t, the government must run a primary surplus equal to the initial deficit amount B0 compounded by the interest rate r over t years, which is represented by B0(1 + r)^t.

Question 16

The debt ratio is the ratio of the debt to:

Accepted Answer

The debt ratio is the ratio of the debt (usually the national debt) to GDP (Gross Domestic Product). It measures the country's ability to pay off its debt based on its economic output.

Question 17

What is a haircut?

Accepted Answer

A haircut refers to a reduction in the value of an asset, in this case, debt owed by borrowers to lenders. It is usually agreed upon by the lenders themselves and not by private sectors, central banks, governments, or borrowers.

Question 18

If the Ricardian equivalence proposition is correct, then:

Accepted Answer

The Ricardian equivalence proposition suggests that deficit spending does not stimulate economic activity because individuals will anticipate the future tax increases needed to pay for deficit spending and therefore the increased government spending will be offset by decreased private spending. This means that deficits have no significant effect on economic activity in the long run.

Question 19

In the short run, a fiscal expansion that causes an increase in the budget deficit:

Accepted Answer

In the short run, a fiscal expansion that increases the budget deficit typically affects both the level and composition of output. This is because government spending directly increases aggregate demand, influencing the overall level of economic activity (level of output), and the specific areas where the government directs its spending can change the composition of output in the economy.

Question 20

Seignorage is equal to:

Accepted Answer

Seignorage refers to the profit made by the government by issuing currency. This profit is equal to the difference between the face value of the currency and the cost of producing it. This can be calculated as the percentage growth rate of nominal money times real money balances, since the government earns seignorage revenue based on the total amount of money in circulation. Therefore, the best choice is D.

Quiz 23: Fiscal Policy: a Summing up