{"id":13149,"date":"2011-01-16T04:00:16","date_gmt":"2011-01-15T17:00:16","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=13149"},"modified":"2011-01-16T04:00:16","modified_gmt":"2011-01-15T17:00:16","slug":"saturday-quiz-january-15-2011-answers-and-discussion","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=13149","title":{"rendered":"Saturday Quiz – January 15, 2011 – answers and discussion"},"content":{"rendered":"

\t\t\t\tHere are the answers with discussion for yesterday’s quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
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\nQuestion 1:<\/strong><\/p>\n

\nA coordinated fiscal austerity plan across all nations (aiming to run budget surpluses) would not be possible without impairing growth because it is likely that the private domestic sector in some countries will desire to save overall.\n<\/p><\/blockquote>\n

The answer is False<\/strong>.<\/p>\n

The question has one true statement in it which if not considered in relation to the rationale for the true statement would lead one to answer True. But the rationale presented in the question is false and so the overall question is false.<\/p>\n

The true statement is that “it is impossible for all governments (in all nations) to run public surpluses without impairing growth”. The false rationale then is that the reason the first statement is true is “because it is likely that the private domestic sector in some countries will desire to save overall”.<\/p>\n

The question thus tests a knowledge of the sectoral balances and their interactions, the behavioural relationships that generate the flows which are summarised by decomposing the national accounts into these balances, and the constraints that is placed on the behaviour within the three sectors that is evident in the requirement that the balances must add up to zero as a matter of accounting.<\/p>\n

Once again, here are the sectoral balances approach to the national accounts.<\/p>\n

We can view the basic income-expenditure model in macroeconomics in two ways: (a) from the perspective of the sources<\/strong> of spending; and (b) from the perspective of the uses<\/strong> of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.<\/p>\n

From the sources<\/strong> perspective we write:<\/p>\n

GDP = C + I + G + (X – M)<\/p>\n

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).<\/p>\n

From the uses<\/strong> perspective, national income (GDP) can be used for:<\/p>\n

GDP = C + S + T<\/p>\n

which says that GDP (income) ultimately comes back to households who consume (C), save (S) or pay taxes (T) with it once all the distributions are made.<\/p>\n

Equating these two perspectives we get:<\/p>\n

C + S + T = GDP = C + I + G + (X – M)<\/p>\n

So after simplification (but obeying the equation) we get the sectoral balances view of the national accounts.<\/p>\n

(I – S) + (G – T) + (X – M) = 0<\/p>\n

That is the three balances have to sum to zero. The sectoral balances derived are:<\/p>\n