Question

Which of the following describe a No-Ponzi scheme condition? (Check all that apply.)

1. A condition that prevents continuous borrowing to pay interest without reimbursing principal
2. An investment scheme created by Ponzi
3. Transversality condition
4. A condition for solvency
5. A requirement that debt cannot grow without bounds

Give an explanation to your answer/answers

TOTAL [5 Marks]

QUESTION TWO (2)

What is another term for primary balance?

1. Most important balance
2. Overall balance
3. Non-interest balance
4. Operational balance

Give an explanation to your answer/answers

TOTAL [5 Marks]

QUESTION THREE (3)

The solvency condition is derived from the flow budget constraint by imposing the _____________ condition.

1. Intertemporal budget
2. Solvency
3. Transversality
4. Debt dynamics

TOTAL [5 Marks]

Answer 1

1.

a.a condition that prevents continuous borrowing to pay interest without reimbursing principal is not describe as a no ponzi scheme condition. Because a no ponzi game condition is a constraint that prevents overaccumulation of debt.

b. An investment created by ponzi is not describe a no ponzi scheme condition. A ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors. In no ponzi scheme condition there isn't fraudulent investing scam.

c.Transversality condition is describe a no-ponzi scheme condition. Because the no-ponzi condition on public and private debt which also stands for transversality condition for debt eliminates the possibility of a ponzi chain letter by stating that the growth of private and public debt has to be lower than the real interset rate. The transversality condition must be satisfied in order for the individual to maximize indeed its intertemporal utility.

d.A condition of solvency is also describe a no ponzi scheme condition. Because the "no-ponzi' game or "solvency" condition is an external constraint imposed on the individual by the other participants or by the market. And the individual would very much like to violate it.

e. A requirement that debt cannot grow without bounds is not describe a no ponzi scheme condition.because the term no ponzi or transversality condition is a requirement that debt can grow with bounds and Therefore government can grow its debt without bound in ponzi scheme condition.

2.

a. Most important balance is not another term for primary balance. Because debt is the single most important item in tha balance sheet.

b. Overall balance is not another term for primary balance because this is the sum of balances of current account and the non reserve portion of the capital and financial account plus omissions.

c. Non interest balance is the another term for primary balance because primary balance is defined by the organization for economic co-operation and development as government net borrowing or net lending but excluding interset payments on consolidated liablities of government.

d. Operational balance is not another term for primary balance because operating balance includes cash, investment etc. In a particualr fund at the end of the year after recieving all the revenue and all appropriations that were budgeted have been spent.

3.

a. The solvency condition is derived from the flow budget constraint by imposing the Intertemporal budget condition. Because the solvency condition defines an intertemporal budget constraint imposing existing public debt levels to be most equals to present value.

b. The solvency condition is not derived from the flow budget constraint by imposing the Solvency condition. Because it is not a correct definition of solvency condition. Solvency condition is derived from the flow budget by imposing the intertemporal budget condition and not solvency condition. It does not derived imposed by its own.

c. The solvency condition is not derived from the flow budget constraint by imposing the transversality condition. Because the solvency condition is derived from the flow budget constraint by imposing the intertemporal budget conditon and not imposed by transversality.

d. The solvency condition is not derived from the flow budget constraint by imposing the Debt dynamics condition. Because the ratio of debt to income is aeasure of the capacity to repay debt. So solvency is not imposed by debt dynamics.