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Saturday Quiz – August 28, 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 money multiplier suggests that changes in the monetary base are driven by changes in the money supply




2. When economic growth resumes the automatic stabilisers work in a counter-cyclical fashion and ensure that the government budget balance returns to its appropriate level.




3. One possible problem with running continuous budget deficits is that the spending builds up over time and with inflation eventually becoming the risk that has to be managed.




4. Only one of the following propositions is possible (with all balances expressed as a per cent of GDP):





5. The IMF and the European leaders all claim that Eurozone nations need to rely on internal devaluation to restore growth and so the austerity programs are designed to deflate nominal wages and prices. It is claimed that for each individual economy this strategy will render it more competitive as long as real unit labour costs fall faster than their trading partners. However, ignoring whether the logic is correct or not, which of the following propositions must also follow if the logic is to follow:







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    This Post Has 2 Comments
    1. Surely, Bill, Q3 should be ‘Maybe’ – depending on how many real resources (supply-side contraints, saving rates etc) the economy has at a given point in time. The question asks:

      One possible problem with running continuous budget deficits is that the spending builds up over time and with inflation eventually becoming the risk that has to be managed.

      It cannot be true (unless you take the ‘anything is possible’ approach) as we do not know how many resources are available (more info is required on this point), and as a general rule, infrastructure spending (broadband, roads, ports etc) allows for an increase in capacity utilisation, fixed investment etc. Equally, it cannot be false – although the U.S., for example, has run continuous budget deficits for decades (ignoring Clinton surplus) without inflationary outbreaks – during the exponential rise transfer payments for the aging population (not oil shocks) caused rapid inflation in the areas of healthcare and education between 1973-76 (i.e. nominal demand exceeding supply). Thus, ‘maybe’ seems like the most sensible answer – we require more information to decide, even though it is ‘unlikely’ (though not impossible) running continuous budget deficits would equal inflation (just ask Japan and Signapore who have hardly had this problem, the latter which is willing to run deficits but has low inflation and good infrastructure).

    2. The money multiplier truly “suggests that changes in the monetary base are driven by changes in the money supply”, its just that the suggestion is a lie.

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