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Saturday Quiz – July 17, 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. The National Accounting identity says that total spending is the sum of household consumption, private investment, government spending and net exports. To understand this in terms of a stock-flow consistent macroeconomics, where we have to always trace the impact of flows during a period on the relevant stocks at the end of the period, we would interpret the spending components as flows add to the stock of aggregate demand which in turn impacts on the final production (Gross Domestic Product).

2. Assume the current public debt to GDP ratio is 100 per cent and that the nominal interest rate and the inflation rate remain constant and zero. Under these circumstances it is impossible to reduce a public debt to GDP ratio, using an austerity package if the rise in the primary surplus to GDP ratio is always exactly offset by negative GDP growth rate of the same percentage value.

3. If the household saving ratio rises and there is an external deficit then Modern Monetary Theory tells us that the government must increase net spending to fill the private spending gap or else national output and income will fall.

4. Even though the money multiplier found in macroeconomics textbooks is a flawed description of the way the monetary system operates, having some positive minimum reserve requirements does constrain credit creation activities of the private banks more than if you have no requirements other than the rule that balances have to be positive.

5. It is clear that EMU nations cannot use the exchange rate mechanism to adjust for trading imbalances arising from a lack of competitiveness within the Eurozone. With fiscal and monetary policy tied by the EMU arrangements, the only adjustment mechanism left is to reduce wages and prices to restore competitiveness. While harsh this will ultimately improve the competitive position of Greece, Portugal, Ireland and other nations currently in external deficit.

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    This Post Has 6 Comments
    1. second that

      he’s exposed himself, and is there for the taking

      invoking the quantity theory is his fatal critical error in that post

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