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Saturday Quiz – July 24, 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 #70

  • 1. If the external sector is in deficit overall and GDP growth rate is faster than the real interest rate, then:
    • Neither the private domestic sector or the government sector overall can pay down their debt liabilities.
    • Either the private domestic sector or the government sector overall can pay down their debt liabilities.
    • Both the private domestic sector and the government sector overall can pay down their respective debt liabilities.
  • 2. The debt of a government which issues its own currency and floats it in international markets is not really a liability because the government can just continuously roll it over without ever having to pay it back. This is different to a household, the user of the currency, which not only has to service its debt but also has to repay them at the due date.
    • True
    • False
    • Maybe
  • 3. If the US budget deficit keeps rising to meet the need for more fiscal stimulus, the US government would have to bear the political costs of a rising public debt ratio.
    • True
    • False
  • 4. Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.
    • True
    • False
  • 5. The fact that large scale quantitative easing conducted by central banks in Japan in 2001 and now, more recently, in the UK and the USA has not caused inflation provides a strong refutation of the mainstream Quantity Theory of Money, which claims that growth in the stock of money will be inflationary.
    • True
    • False

Sorry, quiz 70 is now closed.

You can find the answers and discussion here

This Post Has 3 Comments

  1. No way Q1 answer is correct.

    There are all kinds of assumptions made when one is talking of sustainability. The simplest of these arguments use a closed economy model. It is not even true that governments should pursue a policy of going into a primary surplus.

    The issue of fiscal leakage to the external economy often comes up in the conservative attacks on expansionary policy. It is a total mis-nomer. It just means the spending multiplier is smaller (given the import leakage) and so a greater expansionary impulse is required for a given identified aggregate demand gap.

    Its a seductive argument but that strategy implies that the public debt to gdp ratio will sooner or later be hurtling into the unsustainable territory. To assume that the currency will take care of itself is like chasing a mirage. The later the adjustment, the more painful it is. Keynes is supposed to have been told by Lenin that there is no surer way to overturn a country than to degrade its currency. The later the degradation happens the more hurtful it will be.

  2. Since fiscal policy is important for growth, the rules of the game have to be changed. Concerted action and new international arrangements for nations to trade with each other are needed so that aggregate demand is sustained.

  3. Ramanan –

    The Q1 answer looks right to me. The question is about the situation at that time, not whether it’s a sustainable policy.

    As for the debt to GDP ratio, that alone is insufficient to determine whether or not an economic policy is sustainable.

    It’s Q3 I’m more concerned about. It referred to the public debt ratio>/i>, not the debt to GDP ratio. I don’t think it could accurately be called false unless it specifies exactly which ratio it means.

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