Question

I know for sure it is not 1% or 2% but not sure if it is .5% or 1.5%.

A rule of thumb is that a 1% increase in output leads automatically to a reduction in the deficit of what percentage of GDP? 2% 0.5% O 1% 1.5%

I know for sure it is not real intrest but not sure if it is nominal gov bonds or corp bonds.

Answer 1

1. Rule of thumb is based on symmetrical information. Thus 1% increase in output leads to 1% decrease in budget deficit.

2. An economy is said to be in liquidity trap when the short term nominal interest rate on government bonds is down to zero.

​​​​​​Liquidity trap refers to a state in which the nominal interest rate is close or equal to zero and the monetary authority is unable to stimulate the economy with monetary policy. The correct answer is government bonds since buying or selling of government bonds is a monetary policy measure to increase or decrease money supply in the economy. And since liquidity trap is associated with montary policy ineffectiveness, nominal interest rate of government bonds tends to be zero.

The corporate bonds on the contrary are debt securities traded in corporate bond market.