Saturday Quiz – May 23, 2009

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 #10

• 1. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be
• difficult to assess because the Treasury forward estimates are subject to forecasting inaccuracy.
• biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.
• biased downwards thus indicating, at any point in the business cycle, that the government fiscal stance is less expansionary than it actually is.
• 2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that
• it is important in these situations to always increase the budget deficit to match the fall in private spending.
• it is important in these situations for banks to reduce interest rates to stimulate investment.
• the resulting spending gap may manifest as a combination of rising net exports and/or rising budget deficits.
• 3. The experience of Norway with its strong net exports contribution shows that
• running budget deficits are not sufficient to generate low levels of unemployment.
• running budget deficits will be sufficient to generate low levels of unemployment.
• countries should pursue export-led growth strategies to generate low levels of unemployment.
• 4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will
• reduce the room for other non-inflationary discretionary deficit spending because they will "fill up the spending gap" more quickly.
• reduce the capacity of the private sector to save because they will require cuts backs in the deficit to support the repayments.
• not reduce the room for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".
• 5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)
• only if the real wage cuts reduced the overall desire to save by the non-government sector.
• only if workers accepted the cuts and agreed to supply more labour.
• because this will reduce labour costs and align them better with the declining revenue that the recession has caused.

Sorry, quiz 10 is now closed.

scroll down to find the answers and explanation below.

Quiz #10 answers

• 1. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be

Answer: biased upwards thus indicating, at any point in the business cycle, that the government fiscal stance is more expansionary than it actually is.

Explanation: Please read Structural deficits - the great con job! or post a comment for further discussion.

• 2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that

Answer: the resulting spending gap may manifest as a combination of rising net exports and/or rising budget deficits.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 3. The experience of Norway with its strong net exports contribution shows that

Answer: running budget deficits will be sufficient to generate low levels of unemployment.

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will

Answer: not reduce the room for other non-inflationary discretionary deficit spending because increasing imports will keep opening the spending gap that has to be "filled".

Explanation: Please read Norway and sectoral balances or post a comment for further discussion.

• 5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)

Answer: only if the real wage cuts reduced the overall desire to save by the non-government sector.

Explanation: Please read Deficit spending 101 - Part 1 or post a comment for further discussion.