Saturday Quiz – October 15, 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 #134

  • 1. We are told that a country is running a small current account deficit and that the private domestic sector is saving overall. However, we cannot tell what the government budget balance will be as a percentage of GDP until we know the relative magnitudes of the other two balances.
    • False
    • True
  • 2. The private sector is wealthier if the government matches its deficit spending with bond issues relative to if the government just spent without issuing bonds (that is, instructed the central bank to credit bank accounts).
    • False
    • True
  • 3. Modern Monetary Theory (MMT) explains how central banks sell bonds to drain excess bank reserves in order to maintain their given interest rate setting. We know that the same outcome can be achieved by paying interest to the commercial banks on the same reserves. Ignoring any reserve requirements, this means that there is no need for government (via the central bank) to issue debt when it net spends.
    • False
    • True
  • 4. Continuous budget deficits increase the stock of public spending which might increase the inflation risk if spending exceeds the real capacity of the economy to increase output.
    • False
    • True
  • 5. Premium Question: To reduce trade deficits, Eurozone nations are seeking to restore export competitiveness (within the Eurozone) by domestic deflation (reducing domestic wages and prices relative to other nations) given they do not have a flexible exchange rate. However, export competitiveness may still fall no matter how much some nations deflate.
    • False
    • True

Sorry, quiz 134 is now closed.

You can find the answers and discussion here

This Post Has 12 Comments

  1. The first one I took was 5 of 5; after that it fell to 1 of 5 for weeks. Back up to 3 of 5 for this one, but I’m looking forward to finding out why I missed #4.

  2. 4 out of 5.

    I got Question 3 incorrect.

    For those concerned about Question 4. I believe the answer you’re looking for is in this section – “Continuous budget deficits increase the stock of public spending” not the remainder of the sentence.

  3. I’ll need to check my phrasing, but I’d like to go over Q2 if it said:

    2. The private sector is wealthier [in the present but may not be in the future] if the government matches its deficit spending with bond issues …

  4. Q3, “Ignoring any reserve requirements”. So I assume raising the reserve requirement would work too.

    “Modern Monetary Theory (MMT) explains how central banks sell bonds to drain excess bank reserves in order to maintain their given interest rate setting.”

    And is the interest rate (central bank overnight rate) setting mostly about attempting to control debt levels? For example, an economy needs $1 million more in spending and has a 10% reserve requirement. The gov’t spends $1 million with no bond attached. The overnight rate goes to zero(0). Next, entities start borrowing to spend until the borrowing total reaches $10 million. Shouldn’t that get the central bank overnight rate back to where it was? However, instead of $1 million in spending, there is $11 million in spending causing price inflation.

  5. Piccola,

    I take it you’re well to the west of Bill’s longitude.

    Being drunk at 10.42 am on a Saturday morning would not be a good look.

  6. I really thought this was the one I’d finally get 5/5 on and I whiffed on 3 and 4 which I thought were straightforward easy ones I understood. Four might have been something I don’t grasp with the specific use of the word stock (as opposed to flow). Three just left me baffled with no clue why I’m wrong.

  7. Although government deficit spending is a flow it does accumulate into a stock, which MMT recognizes as the fact that government deficit spending raises the stock of reserves in the banking system.

  8. 3+4 seem to be the tricky ones (I got them wrong too), I still object to being lablled as someone with “neoliberal” tendencies just because I got the effi answers wrong. Most unfair but must ry harder I suppose…

    However, I always get the anti-spam maths question right.

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