Saturday Quiz – July 4, 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 #16

• 1. In the modern parlance, a liquidity trap occurs when
• banks have excess reserves from budget deficits which means low interest rates do not stimulate the economy.
• banks do not have enough cash to lend which means that low interest rates do not stimulate the economy.
• banks cannot find any credit-worthy borrowers which means that low interest rates do not stimulate the economy.
• 2. Consider this logic: (a) Atoms are not visible to the naked eye; (b) Humans are made up of atoms; (c) Therefore, humans are not visible to the naked eye. This logical flaw is demonstrated in macroeconomics by
• the paradox of thrift.
• the Government Budget Constraint.
• the Gold Standard.
• 3. If a household saves a higher proportion of their income they will have higher future consumption possibilities. Therefore if all households save a higher proportion of their income then all households will have higher future consumption possibilities. This logic is
• is only true if taxation is held constant.
• is only true if government increases its deficit in line with the saving increase.
• is only true if interest rates rise and deliver higher returns on the saving.
• 4. Rising government bond yields for new issues indicate
• that bond prices are falling in response to demand.
• that government spending is becoming more expensive.
• that government spending is increasing the cost of borrowing for private investors.
• 5. In a "balanced sheet recession", aggregate demand falls
• because businesses and households start saving to reduce the debt exposure they created in the boom.
• because government creates fiscal drag by running budget surpluses.
• because businesses become pessimistic about future rates of return and stop investing.

Sorry, quiz 16 is now closed.

scroll down to find the answers and explanation below.

Quiz #16 answers

• 1. In the modern parlance, a liquidity trap occurs when

Answer: banks cannot find any credit-worthy borrowers which means that low interest rates do not stimulate the economy.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 2. Consider this logic: (a) Atoms are not visible to the naked eye; (b) Humans are made up of atoms; (c) Therefore, humans are not visible to the naked eye. This logical flaw is demonstrated in macroeconomics by

Answer: the paradox of thrift.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 3. If a household saves a higher proportion of their income they will have higher future consumption possibilities. Therefore if all households save a higher proportion of their income then all households will have higher future consumption possibilities. This logic is

Answer: is only true if government increases its deficit in line with the saving increase.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.

• 4. Rising government bond yields for new issues indicate

Answer: that bond prices are falling in response to demand.

Explanation: Please read Time for a reality check on debt - Part 1 for more information or post a comment if you are unsure.

• 5. In a "balanced sheet recession", aggregate demand falls

Answer: because businesses and households start saving to reduce the debt exposure they created in the boom.

Explanation: Please read Balance sheet recessions and democracy for more information or post a comment if you are unsure.