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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.

This Post Has 2 Comments

  1. Hi Bill,

    I got question 4 wrong.

    “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”

    My interpretation is the interest servicing of government debt increases the size of government deficit spending and this will decrease the spending gap. I picked “reduce the room for other non-inflationary discretionary deficit spending because they will “fill up the spending gap” more quickly” rather than the correct answer. Any help on where I went wrong would be appreciative.

    Cheers,

  2. PLEASE DO NOT READ UNTIL YOU HAVE DONE THE QUIZ

    Dear Anthony

    Yes, it was a trap. If nothing else changed this would clearly be the case. Repayment and interest-servicing of the debt are government spending just as building a bridge or paying some supplier. The spending occurs in just the same way – crediting bank accounts and/or writing a cheque. So if the government can pay the supplier of pens to the Treasury then it will also be able to pay back the debt as it matures given it is not revenue-constrained. There is never an insolvency issue.

    But then what impact does the spending have? Well it stimulates nominal aggregate demand, which in turn increases national income. As part of that increase leakages via imports and saving occur, which increase the “spending gap”. So it is likely that the “room to inject nominal aggregate demand” will not be squeezed by the increasing debt servicing obligations.

    The question is an “modern monetary” application of the sectoral balances logic.

    I hope that helps.

    best wishes
    bill

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