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Saturday Quiz – June 12, 2010

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.

1. In a fiat monetary system (for example, US or Australia) with an on-going external deficit, if you desire the domestic private sector to reduce its overall debt levels without employment losses, then you have to support the national government continually increasing the budget deficit in line with the private de-leveraging process.

2. Sovereign funds do not store budget surpluses as national savings. They just account for assets that the government has bought in the same way that the property records of, say, the public schools and hospitals record holdings of other public assets accumulated through government spending.

3. The massive build-up of Chinese holdings of US government debt has allowed US citizens to enjoy a higher material standard of living at the expense of the residents of China.

4. Short-term interest rates are set by the central bank while the fiscal strategy manifests in tax and spending decisions by the government. Whereas the private sector cannot directly influence the interest rate target being set it can determine the size of the budget deficit at any point in time.

5. If employment growth matches the pace of growth in the civilian population (people above 15 years of age) then the economy will experience a constant unemployment rate as long as participation rates do not change.

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    This Post Has 5 Comments
    1. I think the answer to number 3 should be maybe … this is not assured unless the U.S. also follows a full employment fiscal policy…. in the absence of this, some people may enjoy a higher material standard of living, while others will be unemployed due to cheap imports.

    2. Bill, should Q5 be False

      If employment grows in line with growth of population adjusted for participation rate then unemployment rate is going down. If you adjust population growth for participation rate AND current unemployment rate then unemployment rate will not change.

    3. 4. must be false.

      Assume it’s true. Then adjust the resulting deficit with a discretionary fiscal transfer that is a surprise to the private sector. Contradiction. So it’s false.

    4. Question 4 is definitely false. if it were true, there is no way governments could put through austerity measures which reduce deficits at the exact moment when the private sector needs deficit spending the most.

      Asa a result, the private sector [ cannot ] determine the size of the budget deficit at any point in time. Only government officials ultimately can, unfortunately.

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