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Saturday Quiz – October 16, 2010

Welcome to the billy blog Saturday quiz – London 2010 Edition. 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. If the growth in wages (the money you get paid) keeps pace with inflation which is accelerating at the same rate as labour productivity is growing then the profit share in GDP remains constant.

2. Central bankers are talking about the possible need for more quantitative easing to ease the aggregate demand losses associated with the implementation of fiscal austerity programs. If calibrated correctly, QE can replace the net financial assets destroyed by the withdrawal of the fiscal injection.

3. The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.

4. The change in the net worth of the non-government sector when the government increases its net spending is invariant to government issuing debt which exactly matches ($-for-$) the increase in net public spending.

5. Premium Question: The government is attempting to stimulate the economy via an expansion in the budget deficit. The private market orientated advisors tell them to cut taxes and "privatise" the expansion whereas the more civic-minded advisors argue that there is a need for improved public infrastructure which requires increases in government spending. So imagine that the government is choosing between a tax cut that will reduce tax revenue at the current level of national income by $x and a spending increase of $x. Which policy option will have the greater initial impact on aggregate demand?

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    This Post Has 10 Comments
    1. Is the answer to Q5 based on your opinion or fact. If the govt contracted to have a road improved and 40% of the money went to corporate profits that were saved aggregate demand would increase but not by the full spending. A tax cut could increase aggregate demand by more than the tax cut if it allowed some consumers (including business) to move consumption forward by taking out loans for consumption and investment. True?

    2. markg – my thinking on this question was based on “greater initial impact” part of the questions – with spending, the spending has to happen, the profits don’t just come off the top (unlike a bailout), whereas with a tax decrease, there is discretion as to whether to spend. After the “initial impact”, then savings and profit calculations come into play in which case your reasoning applies.

      Anyway, that was my logic, whether it is correct or not is a different question.

    3. 3 out of 5. I still have neo-lib tendencies … sigh.

      Not because I support the ideals. It’s more because I’m semantically challenged and easily get muddled with double negatives.

      Much like the general public :)

    4. Speaking of semantics, I’m thinking the words “the same rate as labour productivity is growing” (productivity being a ratio) as implying a reduction in labour’s share of the pie (and an increase in profits as a share of GDP) because capital is the benficiary of the productivity growth.

    5. Bill, how can one answer five if the targeting of the spending and tax cuts is not specified, since it is a matter of deciding how quickly funds will increase effective demand?

    6. Dear Bill,

      Just wanted to post a request (to TomH et al who have helped in the past): have just finished reading Michael Hudson’s ‘Why the IMF Meetings Failed’ over at (michael-hudson dot com) – I would like to learn how MMT theory might / (may not) absolve Michael’s concerns – or read recommended relevant MMT literature?? Am curious about the extent of the conceptual integration between MMT and Michael’s body of work. Thanks in advance for any reply.

      Thanks also to Victor for a clear and beautifully written depiction.


    7. Jrbarch: I can’t answer your question, but I appreciate your pointing me to Michael Hudson’s post. I also would like to know how MMT would view what is going on with QE. I’m referring to the way Ben Bernanke and the Treasury seem to be in concert to destroy the complete world economy designed after WWII in order to save the big Wall Street firms. It is interesting to see the events happening in Europe and I have been wondering how long they will last until there is a complete revolt by the citizens of those countries. Probably the big problem for the EU is that it tried to accomplish in a few years what it took thirty years to do in the US. In reference to the neoliberals, I have never seen anyone who benefited from a system, at the expense of others, give it up without a fight.

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