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Saturday Quiz – November 27, 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. According to the theory of the money multiplier that changes in the monetary base are driven by changes in the money supply.

2. If the nation is running a current account deficit which is accompanied by a government sector surplus of equal proportion to GDP, then the private domestic sector is spending more than they are earning and increasing its indebtedness.

3. With the Eurozone nations unable to gain competitive relief via nominal exchange rate adjustments the hope is that by deflating wages and prices real unit labour costs will fall. Assuming other nations do nothing and wages and prices fall at the same rate, then a real exchange rate depreciation (relative to other nations) requires labour productivity and employment growth to rise.

4. In a stock-flow consistent macroeconomics, we know that flows during a period add to relevant stocks at the end of the period. Accordingly, government and private investment spending are two examples of spending flows that add to the stock of aggregate demand which in turn impacts on Gross Domestic Product (National Income) because spending equals income.

5. Premium question: Many countries are facing higher public debt to GDP ratios as a consequence of the crisis and some are approaching 100 per cent. Assume the current public debt to GDP ratio is 100 per cent and that central banks keep nominal interest rates and inflation constant and zero. While fiscal austerity is likely to prolong the recession, it is still possible to reduce the public debt to GDP ratio (under these circumstances), if the primary budget surplus to GDP ratio is higher than the negative GDP growth rate that results.

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