The Weekend Quiz – August 18-19, 2018

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.

Quiz #491

  • 1. 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.
  • 2. The more funds that commercial banks have on account with the central bank the more they can lend out to customers.
    • False
    • True
  • 3. 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 491 is now closed.

You can find the answers and discussion here

This Post Has 12 Comments

  1. Three outa three this week!
    Probably an easier quiz, rather than my economic expertise!

  2. In May 2013 Bill wrote an excellent blog post in which he estimated that as of December 2012, Australia’s incremental output gap was 3.9 percent of GDP ($60 billion) on an annualized basis. The post was entitled Australia Output Gap – Not Close To Full Capacity.

    Bill used the term incremental output gap because it depicts the increase in whatever gap existed at the time the forecast period began. An estimate of incremental output gap does not assume that the gap at the starting point of the forecast period coincided with potential output or full employment. Maybe it did, maybe it didn’t. There is no way to know for sure, so it is better to measure the change since that starting point and accurately label it an incremental output gap rather than call it an absolute output gap.

    In another May 2013 blog post entitled Investing in a Job Guarantee – How Much? Bill estimated that lowering the unemployment rate from its level at the time (5.6%) to 2% would require a Job Guarantee that invested $22 billion (a little over a third of the estimated incremental output gap) over a full year.

    Five years later, what would be reasonable estimates of Australia’s incremental output gap and the amount of Job Guarantee investment over a full year that would be needed to lower the unemployment rate to 2%?

  3. I’m new to MMT and despite having answered the third question correctly through guesstimate, I cannot avoid feeling that MMT does not seem very concerned with things like the public debt ratio, or the effect of a potential currency devaluation. Am I wrong?

  4. 3 out of 3.

    I still would like to see the solution for number 3 though to get a better understanding. There is a chance i am mixing stuff up.

    My take on Q3:

    The public debt ratio is the national debt to GDP.

    who really should give a damn about the numerator ie national debt? If we want the quotient to be less in value, just stop selling treasury securities. I don’t think anyone serious should concern him/herself about big number used to scare people to buy gold.

    I don’t even know if economic growth should bring down public debt ratio. Krugman and others say that you can pay it off when you have growth.

    However, that is simply incorrect because growth has no bearing on whether a government can pay off its debt whenever it wants. There is no relationship. The government can always do that. Maybe there is a chance that people don’t want to buy treasure securities anymore because economy is growing and they want a higher return by investing in stock speculation.

    I don’t know much about stocks but aren’t they are secondary market? so they are not really investment in companies. Furthermore, I learned that most companies grow with investing their own profits (when they are not doing massive stock buyback that is).

  5. Is there any way to download, say by a huge zip, all of Bill’s blog posts back to the beginning of the Billy Blog?

    I wish Bill another half decade of blog posts, but I think together they constitute a treasure trove — the Mitchell Papers! Over the years they have been very useful for me in my work too.

    I know that a substantial proportion of these posts reappear in Bill’s books (I have three of them), but there is much other discussion which is really helpful. Many of the comments are fine as well.

  6. I think the answer to question 3 is that the public debt ratio in itself is of no concern because the debt is denominated in the currency-issuer’s currency, which means that there is no solvency risk at all. The government will service that “debt” in the same way that it makes all payments in its currency: by crediting the appropriate bank accounts at its central bank.

    The public debt is just dollars that the government has already spent and that have not yet been used to pay taxes. The dollars are kept in a type of central bank account called “Treasury bonds” or “Commonwealth Government Securities” or whatever the government chooses to call it. If the central bank wants to move those dollars into a different type of central bank account called “reserves”, it can do that by buying bonds back and giving the sellers reserves in exchange.

    The amount of public debt reflects the combined non-government sector’s desires (domestic and external) to net accumulate financial claims in the government’s currency).

    Dollars that have not yet been used to pay taxes and that are held in central bank accounts called “Treasury bonds” do not financially constrain the government because the government is the monopoly issuer of the currency. Treasury bonds don’t “crowd out” private sector investment because if there are profitable investment opportunities available, the owners of the bonds can always sell them for reserves, and use reserves to make the investments they want to make. It is the investment climate that determines how much investment the private sector makes. Investment climate is influenced by aggregate demand, opportunity to expand production, availability of skilled workers, quality of public infrastructure and public services, political stability, impartial and professional courts that can enforce contracts).

  7. Hi Bob,

    Very wrong and welcome so good to have you here. You are about to go on a journey of discovery. It won’t happen over night you have to put the leg work in.

    Use the search engine on the site and put in public debt and currency depreciation and search for stuff you want to know about.

    Public sector debt is the non governemnt sectors ” savings” so it can be a concern if the private sector or the foreign sectors are ” saving” too much.

    The government budget deficit is the non Government sector savings ( Surplus) and the national debt are those savings moved into gilts in the UK treasuries in the US.

    When a currency is in free fall or under attack. MMT have ways to deal with that by changing the structure of the central bank, change the commercial banks and introducing capital controls.

    Plus if the £ is in free fall or under attack that means all other currencies are getting stronger against it and exporting to growth countries don’t like that. They don’t like a strong currency.

    For example take the fall in the £ Bob.

    EUR/GBP 0.90 is the pressure point for EU exporters who export to the UK. So as the cost of imports become more expensive ( their products) consumers look for alternatives.

    Consumers in the UK only have a set income to spend on goods and services every month so if imports become too expensive they look for cheaper alternatives or buy local which helps the UK economy.

    When they do that the EU exporters lose market share. A market share they’ve spent decades building up. So then they have some choices to make

    a) Pay off staff

    b) Reduce wages

    c) Reduce hours

    d) Go bankrupt like the Irish mushroom farmers

    e) Reduce their prices of their goods and services

    f) A mixture of all of the above

    When they do e) and reduce their prices to keep their market share that moves the £ back up and the Euro down the exchange rates adjusts. That’s the beauty of flexible exchange rates they adjust and take the strain compared with fixed exchange rates that break.

    Hope this helps and

    Prime Ministers of the UK should have no fears from global capital markets

  8. Bob, if a nation’s public debt ratio rises, an MMT economist would be very interested in knowing why. If the reason is that output is falling, that is a problem. The solution would usually involve the currency-issuer increasing its net spending into the domestic private sector in ways that enhance productivity. The problem would not be the rise in the public debt ratio. The problem would be falling output. If domestic output falls, there are fewer real goods and services to meet the needs of the population. So living standards fall. Falling output results in people losing jobs, which results in less household spending power, further falls in demand, the social costs of unemployment (family breakdown, substance addiction, mental illness, antisocial behaviour, crime), the economic costs of unemployment (skills atrophy, loss of job readiness, inflationary skills shortages, permanent losses of output and income).

    Falling output can devalue the currency if it results in increasing spending on imports (to replace the lost domestic output). A devalued currency combined with increased dependence on imports undermines living standards even more (I think? Not sure.)

    MMT economists are very concerned about price stability. They just don’t advocate a “fight inflation first” narrow minded focus on price stability that permits high rates of underuse of labour. MMT economists want currency issuers to make active use of fiscal policy to maintain full employment (more job vacancies than job seekers), price stability, and sustainable resource use.

    If the exchange rate falls but there is still full employment, sustainable resource use, good social outcomes, that is a lot better than a higher valued currency with lots of labour wastage, social ills, environmental damage.

  9. Many thanks Derek Henry and Nicholas, this additional colour is most useful!

  10. 3 out of 3!

    Three ideas come to mind:
    1. The three sectors can’t all be in surplus at the same time.
    2. Banks are not reserve constrained when lending
    3. Some economies just need to have permanent fiscal deficits to function.

    Now I’ll read Bill’s answers to see if my thinking is right…..

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