The Weekend Quiz – June 22-23, 2019

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 #535

  • 1. Modern Monetary Theory tells us that a sovereign national government can run deficits without issuing debt. But the debt issuance allows the government to drain demand (private spending capacity) so that the public spending has more non-inflationary room to work within.
    • False
    • True
  • 2. Workers enjoy a stable share of GDP over time if they secure wage increases in line with labour productivity.
    • False
    • True
  • 3. The ratio of the "stock of money" (currency plus demand deposits) to bank reserves fell dramatically in the US in 2008 and been variable since that time. This phenomenon is best explained by a variable money multiplier.
    • False
    • True

Sorry, quiz 535 is now closed.

You can find the answers and discussion here

This Post Has 10 Comments

  1. Got Q2 right. Didn’t try Q1+3 as I didn’t feel I clearly understood Q1+3. But that’s OK. Q2 is an important point.

  2. Why does not the sale of federal bonds (linking the money paid for them to governmental debt) not thereby reduce private sector spending capacity? I was under the impression that money could be drained from the private sector either by federal taxes or bond sales, both of which removed from further circulation the private money going to pay those taxes or purchase those bonds. Did my mistake come when I bought into the last part of the question, that this elimination of money from the private sector inherently creates more non-inflationary room for federal spending? Confused here.

  3. Dear Newton Finn (at 2019/06/22 at 3:38 am)

    The path to understanding this is to also appreciate what the funds that are being drained are currently doing – which, in turn, reflects the motivations and decisions taken by the holders of those funds.

    The inflation risk comes from spending – whether it be government or non-government sourced.

    The funds that are used to purchase bonds are typically already being held as part of a wealth portfolio (which we can conceptually understand to be past government spending not already taxed).

    So the motivation of the bond purchasers is to diversify their wealth portfolios by having more interest-earning, risk-free government bonds and less something else (liquid wealth).

    Those funds were not being spent. So reducing them does nothing to reduce the inflation risk of the government spending.

    I hope that helps.

    best wishes

  4. Bill

    Can you clarify something form me.

    Where does MMT stand on the quantity theory of money (i.e. MV = PQ)

    I know the assertion that the amount of M has a direct bearing on P whilst assuming V and Q will remain constant in the short term has done no end of damage. I lived through the Thatcher recession of the early 1908’s and saw the folly of going full monetarist first hand.

    But as an basic accounting identity, aggregate spending in an economy (i.e. MV) has to equate to the value of what it’s spent on (i.e. PQ) doesn’t it?

    Is it always a case that in the absence of a cost-push phenomenon like an oil crisis, P can only increase if and only if the amount of aggregate spending (i.e. MV) has exhausted the economy’s capacity to produce Q?

  5. Dear PhilipR (at 2019/06/22 at 3:58 pm)

    As you correctly note MV (total spending) must always equal the total output value (PQ). That is just a national accounting identity.

    The disputes between the QTM theorists/appliers and others (including MMTers) is in the causality.

    One person’s spending is another’s income. That is true and fundamental.

    But the division between what is driving the relationship between nominal income (PQ) and real income (where P and Q can both vary) is the interesting question.

    QTM avoid that question by assuming (as a theoretical position) that Q is always at full employment. So with V assumed fixed, changes in M must translate into changes in P.

    Of course, V and Q are variable in the real world.

    But if nominal demand exceeds the capacity to absorb it via Q then P rises. MMT recognises that reality.

    best wishes

  6. Thanks Bill

    It was always the easy assertion of causation (higher M means higher P) that I never felt convinced about.

    I saw a very early refutation of QTM a couple of years ago when reading the proceedings of the Parliamentary enquiries into British banks and their banknote issue in the 1830/40s.

    The London and Westminster’s JW Gilbart was asked (by Robert Peel if my memory hasn’t failed me) if he agreed that his country correspondents’ banknotes were inflationary. His answer was instructive. “Don’t be stupid, they have to issue more banknotes when prices are going up!”. In other words the line of causation ran in the opposite direction to the one posited by QTM. The banking system has to create more money to accommodate inflation!

    Of course a sudden and unanticipated drop in Q could be inflationary too as was the case in Weimar Germany and Zimbabwe.

  7. Can someone with a solid MMT knowledge comment on a trade dispute between China and USA if China floates their currency and maintained capital controls. The mainstream press indicates that USA has the upper hand but China has the real economic capacity and in effect are giving US real goods for T bills and cannot buy usefull assets in USA ie Boing or Apple etc as US will not allow. With MMT lense would China actually benefit restructuring to better reward rhwir citizens for their labour. Has any of the MMT gurus provided an indepth analysis?

  8. Dear PhilipR (at 2019/06/23 at 10:20 am)

    The causality issue was one of the things that led Keynes to depart from his 1930 Treatise to his 1935 General Theory, the latter which completely abandoned any of the Classical monetary theory.

    Keynes observed prices did not respond to changes in broad money and vice versa.

    That led to the liquidity preference theory of interest rates (a monetary phenomenon) and his abandonment of the loanable funds theory of interest rates (a real story).

    best wishes

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