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 – August 4, 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 #176
- 1. A program of fiscal austerity which yields a budget surplus will always undermine attempts by the private domestic sector to save overall when the nation's exports are less than the sum of their imports and net income flows.
- False
- True
- 2. Only one of the following propositions is possible (with all balances expressed as a per cent of GDP).
- A nation can run an external deficit and equal government surplus while the private domestic sector is saving overall.
- A nation can run an external deficit and equal government surplus while the private domestic sector is dis-saving overall.
- A nation can run an external deficit and a larger government surplus while the private domestic sector is saving overall.
- None of the above are possible as they all defy the sectoral balances accounting identity.
- 3. The more funds that commercial banks have on account with the central bank the more they can lend to customers.
- False
- True
- 4. If governments sought funding from the central bank for their net spending (deficits) rather than private bond markets then the inflation risk of such spending would remain unchanged.
- False
- True
- 5. Premium Question: Modern Monetary Theory (MMT) considers that the public debt ratio is of no concern because economic growth will always bring it down after a recession.
- False
- True
Sorry, quiz 176 is now closed.
You can find the answers and discussion here
5/5
Woo-hoo. I’ve still never done it twice in a row, though.
As regards # 4, I had it right, but then changed my mind, as a result of a (mis)reading of Warren Mosler’s blog. Anyway here goes: Does not funding net spending through private bond markets increase the incomes of savers, which would have a mild upward impact on aggregate demand and thus inflation?
5 out of 5. I think we’re ready to move to Newcastle and begin working on our economics degrees.
@Thomas Bergbusch
I’m going to go out on a limb and say that the inflation effect you posit might conceivably occur, but would be so mild and so marginal as to not really matter. Warren Mosler is correct (Bill often makes the same point) that Treasury bonds are a risk-free income stream that helps support aggregate demand during slumps. Hence, “quantitative easing”, which sees the central bank repossessing those income streams and pointlessly returning them to the Treasury, might hurt aggregate demand and might therefore be making the present slump worse. I don’t know how anyone could measure that on the ground, though. We would have to know who was selling the bonds and how their propensity to consume was being affected by the resulting absence of interest income.
I think Bill’s question is focused on the fallacious “quantity theory of money”. For neoliberal ideology does not posit a mild or marginal inflation effect from the scenario posed by Question 4. I think the explanation tomorrow will also reference the dreaded, phantom money multiplier.
@Dale
I would find it surprising the revenue stream from bonds produced measurable inflation at all, unless a domestic economy were already red-hot. In the case of the U.S. aggregate demand is so far below productive capacity that returns to bond-holders, particularly at current yields, is marginal.
Woohoo ! My first 5 out of 5.
Have all a nice day.
Friend of the State! Comrades, sing with me!
Dale and Ben — thanks for your insights.