Saturday Quiz – June 5, 2010

Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days. See how you go with the following five questions. Your results are only known to you and no records are retained.

Quiz #63

  • 1. In a fixed coupon government bond auction, the higher is the demand for the bonds
    • the lower the yields will be at that asset maturity but this tells us nothing about the effect of budget deficits on short-term interest rates
    • the lower the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down
    • the higher the yields will be at that asset maturity which suggests that higher budget deficits will eventually drive short-term interest rates down
  • 2. A sovereign government does not have to issue debt to finance its spending. But the more public debt it voluntarily issues
    • the greater is non-government wealth held in the form of public debt.
    • the less is the volume of investment funds in the non-government sector that can be used for other investments.
    • the more difficult it is for banks to attract deposits to initiate loans from.
  • 3. When the government borrows from the non-government sector it eventually has to pay the bonds back on maturity. This will
    • not be inflationary because the sovereign government just has to credit the bank accounts of those who hold the bonds to repay them.
    • be inflationary if the government payments to bond holders at maturity add more to nominal aggregate demand than the real economy can support given other policy settings.
    • be inflationary if by the time the bonds mature the economy is growing strongly so there will be too much money floating about.
  • 5. In a situation where the private domestic sector decides to lift its saving ratio we cannot conclude that the national government has to increase its net spending (deficit) to avoid employment losses.
    • True
    • False
    • Maybe
  • 4. When an external deficit and public deficit coincide, there must be a private sector deficit, which means that governments can only really run budget deficits safely to support a private sector surplus, when net exports are strong.
    • Maybe
    • False
    • True

Sorry, quiz 63 is now closed.

You can find the answers and discussion here

This Post Has 4 Comments

  1. Bill,

    I do not agree with your Q3. Spending capacity of private sector is not affected by maturing bonds because bonds by definition represent savings of private sector which can be spent at any moment of time regardless of time to maturity (especially with central bank always standing ready to repo these bonds for reserves). And if time to maturity is very close then value of such bonds is not affected by mark-to-market, i.e. they have no MtM risk

  2. Sergei,

    Slightly tricky. The bond maturity also comes with a coupon payment which is counted as income. If the household sector gets paid coupon + principal at maturity, he/she may have a different propensity to consume from income – the coupon – than accumulated wealth. Of course household decisions are not so algorithmic as I am trying to say, but . . . one can rephrase – “periods of high coupon payments can be inflationary if . . .”

  3. Ramanan, coupon is always reflected in the price of the bond regardless of how you use this bond: as collateral or as sale.

  4. Sergei,

    Yep. My point is about the propensity to consume out of interest income from government bonds.

    At an individual level, one thinks of using the coupon into purchasing more government bonds. However it has to looked carefully from a macro perspective. Higher interest payment on government debt leads to higher aggregate demand was the only thing I was trying to say, nothing much about maturity.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top