Saturday Quiz – June 26, 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. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.




2. Bank reserves are maintained to ensure that all the cheques written every day clear when presented. If a bank doesn't have enough reserves then cheques drawn against it will bounce.




3. While a sovereign government is not revenue constrained and voluntarily constrains itself to borrow to cover its net spending position, it remains the case that by substituting its spending for the borrowed funds it reduces the private capacity to borrow and spend.




4. The crucial difference between a monetary system based on the gold standard world and a fiat currency monetary is:




5. When the national government's budget balance moves into deficit:






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    This Post Has 3 Comments

    1. Bill,
      just wondering if your thinking is along the lines of this guy http://csper.org/renaissance-20.html in terms of how the big picure works.

      I’m a big fan of your site, learnd so much from it. I try to pass it around as widely as I can. While I think you write very well and put issues and ideas in a language that a lay person can understand it, I feel that to most people the ideas around money, moentary system and wider implications are just a bit too abstract and difficult to grasp.

      Hence I liked the site above. Would you consider doing something similar i.e series of mini lectures via you tube or something similar.

      Regards
      hrvoje

    2. Q4 answers 2 and 3 are both partially right (or wrong). Under a gold standard the govt could borrow from the fed (print money) so it does not HAVE to issue debt. And the govt can use net spending to achieve full employment under a gold standard, but only under the right conditions. So you asked which was the “crucial” difference. How many times have you said the advantage of a fiat money system is to allows the govt to conduct policy to achieve full employment that it cannot necessarily do under a gold standard? Or am I reading the question/answers wrong?

    3. «Under a gold standard the govt could borrow from the fed (print money) so it does not HAVE to issue debt.»

      But under a gold standard that “money” is redeemable in gold, and unless the government borrows gold (because under a gold standard you either hold or borrow gold) it will be insolvent. You are assuming that under a gold standard the government can borrow in fiat money; but a gold standard means precisely that there is no fiat money, and all paper money is backed by gold.

      «And the govt can use net spending to achieve full employment under a gold standard, but only under the right conditions. So you asked which was the “crucial” difference. How many times have you said the advantage of a fiat money system is to allows the govt to conduct policy to achieve full employment that it cannot necessarily do under a gold standard?»

      That a government can pursue a more full-employment oriented excess spending policy is possible under the gold standard too; it just has to borrow and spend gold. So that’s not the difference that matters. The big difference is indeed that net spending can be financed with fiat money, because the government in that case can create fiat money out of nothing, but cannot create gold out of nothing, whether or not it intended to use the excess of spending to pursue a full employment policy.

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