Question

i. “first, a rise in the debt/GDP ratio means that the current generation is consuming good and services at the expense of future generations. We are in effect stealing from the future by consuming more than we can produce”.

We can consume more than we produce by selling bonds to:

a.Foreigners.

b.The public.

c.The Central bank.

d.All of the above.

ii. if seignior age is $4b, the current deficit is $30b, the structural deficit is $10b, the money supply is $600b, the publicly held national debt is $400b, real growth is 2%, and the economy is at its long-run average unemployment rate, what is the inflation rate?

a. 2%

b. 4%

c. 6%

d. none of the above.

iii. suppose the US dollar is depreciating against the Canadian dollar by 5% per year. If the US nominal interest rate is 10% and the risk premium is 1%(Canada is riskier), then Canada’s nominal interest rate is:

a. 5% or less.

b. more than 5% but not more than 10%.

c. more than 10% but not more than 15%.

d. more than 15%.

Answer 1

Question (i)

A country can consume more than it can produce by way of imports. However, this strategy can result in current account deficit. This will compel the country to raise foriegn debt or foriegn investment to bring in capital account surplus to balance the Balance of Payment account.

This foreign debt can be raised through selling of bonds to foriegners.

So, we can consume more than we can produce by selling bonds to foreigners.

The correct answer is the option (a).