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Saturday Quiz – November 13, 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. By increasing tax rates a sovereign government increases its capacity to spend more without increasing inflation.




2. Ignoring any reserve requirements, if the central bank pays a positive interest rate on overnight reserves then it no longer has to conduct open market operations to ensure its policy rate is sustained.




3. Ignoring any reserve requirements, the payment of a positive return on overnight reserves held by the commercial banks equal to the current policy rate will tend increase the overall level of reserves held by the latter.




4. Other things equal, larger fiscal deficits as a percentage of GDP squeeze the availability of real resources that the private sector can use for other productive uses.




5. Premium Question: For a nation running a small current account deficit, the government budget will always be in deficit if the domestic private sector overall successfully saves.






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    This Post Has 4 Comments
    1. Bill;

      Funny thing. I usually score two or three out of five, like today. But I usually get the premium question right – like today.

      I answered maybe to question one because I thought it would only be true if the economy was at or near full capacity. Now I see – more is always more, no matter how much capacity you already have.

      I just blew number two – I knew that was overwhelmingly true.

      I got question three right.

      I answered maybe on question four because, again, I thought it depended on unused capacity – i.e. if there was a huge amount of slack in the economy, increasing the deficit would just mobilize some idle real resources.

      I got number five right because it is the most important single truth I have learned about the world since I learned that we don’t make history just as we please. And the size of the current account deficit doesn’t matter.

      Best,

      -dp

    2. I have a little confusion going on here…

      On question 2, isn’t the policy rate affected by how much lending banks do, rather than what they earn in overnight interest?

      On question 3, if the banks are earning the same percent in overnight interest as the percent they have to pay to borrow from the discount window, I can’t see how they end up with an increased level of reserves? Wouldn’t that depend on how much they needed to borrow to meet their reserve requirement? What if they start off with very low reserves and earn a small amount in overnight interest, at the same time having to borrow a large amount to meet their reserve balance and paying a lot in interest at the discount rate? How does that increase their reserves?

      (I did get the premium question right though!)

    3. Either I’m getting MMT or the questions are getting a tad easier.

      First opportunity to pull myself out of the neo-liberal doldrums. Spoiled by a fat finger moment.

      I’m taking a mulligan for 4 out of 5 ……. Whoo hoo!

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