Question

The interest rate on 3-year Australia government bonds has been approximately 0.25% since April. Which of the following is the most likely explanation of this near-zero market rate of interest on government bonds?

a. Australia government budget surpluses in recent years.

b. The target cash rate being set at 0.25%.

c. The low level of government debt.

d. Purchases of bonds by the Reserve Bank of Australia on the secondary market.

e. Purchases of bonds by the Reserve Bank of Australia on the primary market.

Suppose you receive the following spot exchange rate quotes from a bank:

AUD/USD 0.65-0.66

You have USD 1,000,000, which you wish to convert into AUD. How many AUD will you be able to purchase?

a. 650,000.

b. 655,000.

c. 1,538,461.

d. 1,515,152.

e. 660,000.

Due to a global economic crisis, the private sector reduces its investment spending and increases its planned saving, so that the private sector financial balance goes from a deficit of 2% of GDP to a surplus of 5% of GDP. The current account balance goes from a surplus of 1% of GDP to a deficit of 2% of GDP. This implies the fiscal balance must go from a ____________ of _________ of GDP to a ___________ of _________ of GDP.

a. surplus; 1%; deficit; 3%.

b. surplus; 3%; deficit; 3%.

c. deficit; 3%; surplus 7%.

d. surplus; 3%; deficit; 7%.

e. deficit; 3%; deficit 7%.

Answer 1

1)

Near zero interest rates are set to revive economic activity in a country.and stimulate growth. This is done so that low cost borrowing is available to people.

The cash rate  influences the price of borrowing money in Australia and New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. Market interest rates are generally held around the Reserve Bank's cash rate level.

Thus,

Option B. The target cash rate being set at 0.25%.

2)

AUD/USD 0.65-0.66

GIven are the bid-ask rates, i.e. rates to sell a AUD and to buy a AUD.

Since you are buying AUD with 100000 USD,

you will get : 100000 x 0.66 = 660000 AUD

Option E - 660,000

3)

The current account may be positive (a surplus) or negative (a deficit); positive means the country is a net exporter and negative means it is a net importer of goods and services.

Also,

Government budget deficits add net financial assets to the private sector and vice versa.

Thus,

Government sector balance( Spending - Tax )  = Private sector balance – External sector balance ( trade)

= ( deficit 2% , surplus 5%) - ( surplus 1% , defecit 2%)

Fiscal balance is ( Taxes - Spending )

Thus, Fiscal balance =  ( surplus 1% , defecit 2%) - ( deficit 2% , surplus 5%)

= ( +1 , -2 ) - ( -2 , +5)

= ( +3 , -7 )

= ( Surplus 3 % , Deficit 7 %)   

Option D : surplus; 3%; deficit; 7%.