Saturday Quiz – August 22, 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 #22

• 1. An understanding of the way bank reserves interact with the central bank tells us that when the government spends less than it taxes in any period its bank balance at the central bank rises which this gives it more capacity to spend the next period.
• False
• True
• 2. If the central bank requires commercial banks to maintain a positive fraction of its deposits as reserves (say 5 per cent) then this modifies the idea that loans create deposits because then the banks have to have reserves before they can lend.
• False
• True
• 3. The interest rate in the interbank market is the price that banks have to pay for overnight funds that are held in the reserve accounts the private banks hold at the central bank. If the total demand for reserves equals the total supply of reserves, then overnight interbank lending will not compromise the central banks short-term interest rate target.
• False
• True
• 4. The fall in hours worked is larger than the fall in persons employed, which economists refer to as "labour hoarding" - that is, firms are holding onto persons but cutting their hours of work. If GDP growth over the next 12 months is 2 per cent and the labour force grows by 2 per cent, the labour hoarding will mean that the unemployment rate will continue to rise.
• False
• True
• 5. The imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector. This allows a transfer of real goods and services from the non-government to the government sector via government spending.
• False
• True

Sorry, quiz 22 is now closed.

scroll down to find the answers and explanation below.

Quiz #22 answers

• 1. An understanding of the way bank reserves interact with the central bank tells us that when the government spends less than it taxes in any period its bank balance at the central bank rises which this gives it more capacity to spend the next period.

Answer: False

Explanation: You might like to review The impact of government on reserve dynamics for further information or post a comment.

• 2. If the central bank requires commercial banks to maintain a positive fraction of its deposits as reserves (say 5 per cent) then this modifies the idea that loans create deposits because then the banks have to have reserves before they can lend.

Answer: False

Explanation: You might like to review The impact of government on reserve dynamics for further information or post a comment.

• 3. The interest rate in the interbank market is the price that banks have to pay for overnight funds that are held in the reserve accounts the private banks hold at the central bank. If the total demand for reserves equals the total supply of reserves, then overnight interbank lending will not compromise the central banks short-term interest rate target.

Answer: True

Explanation: You might like to review The impact of government on reserve dynamics for further information or post a comment.

• 4. The fall in hours worked is larger than the fall in persons employed, which economists refer to as "labour hoarding" - that is, firms are holding onto persons but cutting their hours of work. If GDP growth over the next 12 months is 2 per cent and the labour force grows by 2 per cent, the labour hoarding will mean that the unemployment rate will continue to rise.

Answer: True

Explanation: You might like to review Another sorry chapter in RBA history is looming for further information or post a comment.

• 5. The imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector. This allows a transfer of real goods and services from the non-government to the government sector via government spending.

Answer: True

Explanation: You might like to review Deficit spending 101 Part 1 for further information or post a comment.