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Saturday Quiz – June 11, 2011

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 six questions. Your results are only known to you and no records are retained.

Quiz #116

  • 1. The issuance of bonds by the government to match its net spending (budget deficit) augments the nominal wealth held by the non-government sector.
    • False
    • True
  • 2. Ignoring any reserve requirements, a central bank will eliminate any need to conduct open market operations to ensure its target policy rate is achieved each day by paying a positive interest rate on overnight reserves.
    • True
    • False
  • 3. Ignoring any reserve requirements, bank reserves will be higher than otherwise if the central bank pays a positive return on overnight reserves held by the commercial banks equal to its current policy rate.
    • False
    • True
  • 4. When a country runs a small current account deficit and the private sector is saving overall, the government budget balance will always be in deficit.
    • False
    • True
  • 5. Premium Question: Various governments are imposing austerity budgets on their economies. In Britain and the US, even "progressives"are supporting cutting net spending but prefer to focus on tax increases while the "conservatives" are recommending spending cuts and privatisation. In terms of the initial impact on national income, which policy option will be more damaging - a tax increase which aims to increase tax revenue at the current level of national income by $x or a spending cut of $x?
    • Both will have the same impact
    • Spending cut
    • Tax increase
    • There is not enough information to answer the question

Sorry, quiz 116 is now closed.

You can find the answers and discussion here

This Post Has 5 Comments

  1. Off topic but,for those who haven’t noticed,Michael Hudson has written an excellent article on Greece,the EU and the EMU.

    It is available on Counterpunch or on his blog.

  2. Q5
    If the govt cut spending by reducing only my entitlement and I had money under my mattress and continued spending at my normal level, only my income would be affected. But if the govt increased only my taxes and I had no money saved, I would have to cut my spending which would affect the income of another. In this example the tax increase had a greater immediate effect. I think the answer depends on the target of the spending cut or tax increase.
    BTW, yesterday’s post was one of your best ever. In depth yet simple enough for a 10 year old to understand. You nailed it! Why can’t they get it?

  3. In Q4, I do not know what “saving overall” stands for. Net saving is saving net of investment and different from overall saving.

    Its possible for the private sector to be “saving overall” with a budget surplus and a current account deficit. Its net saving is negative and so is its NAFA but it is saving overall i.e., has positive saving.

  4. Dear Ramanan (at 2011/06/12 at 0:48)

    The question says that the “private sector is saving overall” which means that the term saving relates to the sector as an aggregate. It is clear it means that spending is less than income for the sector.

    Your quibble therefore fails. It is not possible for the private sector to save overall with a current account deficit and a budget surplus. Some households or firms might be saving but
    as a sector that is not possible.

    best wishes
    bill

  5. Dear Bill,

    My point relates to the difference between saving and net saving (saving net of investment).

    Of course, I know in the situation with a budget surplus and a current account deficit, the private sector’s income is less than its expenditure.

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