Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern…
Saturday Quiz – May 26, 2012
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 questions. Your results are only known to you and no records are retained.
Quiz #166
- 1. When an economy is running a current account deficit, national income movements will ensure that only one of the two remaining sectors (government and private domestic) end up spending less than they receive, irrespective of the GDP growth rate.
- False
- True
- 2. Unlike a household which not only has to service its debt obligations over the course of the loan but also has to repay them at the due date, a national government debt, which issues its own currency can always roll over its "own currency" debt obligations and never has to pay them back.
- False
- True
- 3. Standing facilities (credit lines etc) that central banks maintain means that the monetary base always adjusts to the changes in the money supply.
- False
- True
- 4. Over the last two decades, there have been major redistributions of national income towards profits in many nations. This has occurred as a result of the suppression of real wages growth.
- False
- True
- 5. Premium Question: While Modern Monetary Theory (MMT) indicates there is no particular economic or financial significance of a rising public debt ratio for a sovereign currency-issuing nation it recognises the political constraints that governments operate within. Accordingly, it recognises there is a trade-off between the need to run budget surpluses to reduce the public debt ratio and the political problems that austerity brings.
- False
- True
Sorry, quiz 166 is now closed.
You can find the answers and discussion here
Bill ~ This should tickle your fancy:
Are leading papers in an issue of a journal of better “quality”? [VOX/EU]
Still a Neo-lib, always will be, always have been (at least based on my results…)
Re: Question 1.
How do you explain that the USA has been running a current account deficit amid increasing public AND private debt? Clearly the private domestic sector and the public sector have been spending above their income meaning that national income movements ensure nothing.
@Sam ~ Increasing public debt provides the ability to pay down private debts AND fund the current account deficit. The problem isn’t that public debt is increasing; it’s that it hasn’t been increasing enough. The incease in public debt (money) is not an inflation risk, so long as the economy remains well below capacity. Inflation is not caused by the amount of money in the system, but rather how that money is being used, and in a well below capacity economy, it is not being used (spent) enough. This provides the fiscal space for addition money (public debt) to be created without also creating an inflation risk.
I’m very troubled dear Bill Mitchell. I draw that graph using St Louis’ Fed FRED :
https://frappermonnaie.files.wordpress.com/2012/05/taux-directeur-inflation-et-recc81serves-excecc81dentaires.png
Starting with 09.2008, correlation coefficient between excess reserves and CPI is 0.82, between excess reserve and CPI less food and energy is 0.91. They are 0.56 before that date (flooding with excess reserves). In my memory, for all the period (1959 to today), correlation coefficient between fed funds rate and inflation is 0.75 in both cases (with or without food and energy), and it plummets to -0,3, starting in September 2008.
Quantitative Easing is therefore a quite effective way of managing inflation, even more efficient than the interest rates they replace, and even more efficient on general inflation than on speculative food and energy inflation.
I’m now a puzzled MMTer.
Thanks for your help, best regards,
JBB
@Benedict
I understand that, but that’s not what I am asking, I am asking how, in the context of the USA running current account deficits while increasing both public and private debt, anything could possibly be ensuring that only one sector is in deficit when clearly all three are. All three sectors are spending more than they receive. Have I perhaps mistaken the definition of “national income movements”? (defining it as money income and not real income in goods and services).
Sam,
All three sectoral balances have to add-up to zero due to the rules of accounting and mathematics. Therefore it is mathematically impossible for all three sectors to be in deficit (or surplus) simultaneously.
Kind Regards
4 out of 5, and I clicked false, by mistake, for number 4. The easiest question, in my opinion. I’ll never get 5 out of 5.