Saturday Quiz – December 25, 2010

Welcome to the Special North Pole edition of 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 six questions. Your results are only known to you and no records are retained.

1. Money is often considered to be currency plus demand deposits. If there is more money in the economy its value declines.




2. A public works program that digs holes and fills them in again has exactly the same impact on current economic growth ($-for-$) as a private investment plan which constructs a new factory.




3. Economists note that the automatic stabilisers in the government's budget increase deficits (or reduce surpluses) in times of slack aggregate demand. This sensitivity of the budget outcome to the business cycle could be eliminated if the government followed a fiscal rule such that it had to balance its budget at all times.




4. The private and public sectors cannot both reduce their levels of indebtedness if there is an external deficit.




5. Premium Question - It is clear that the central bank can use balance sheet management techniques to control yields on public debt at certain targetted maturities. However, this capacity to control the term structure of interest rates is diminished during periods of high inflation.




6. Bonus question - The population of the North Pole is:






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    9 Responses to Saturday Quiz – December 25, 2010

    1. Ramanan says:

      Slight technicality in Q4:

      Let’s say a nation runs a current account deficit in an accounting period, say a quarter. It may happen that the citizens’ holdings of assets held abroad make capital gains (not necessarily realized). It may be due to a terrific increase in equity prices in the foreign country. Also assume that liabilities to foreigners doesn’t change that much in market value.

      Then in spite of running an external deficit, its possible that indebtedness to foreigners may not have increased but decreased if closing stocks are properly computed taking revaluation gains into account.

    2. Fed Up says:

      “Money is often considered to be currency plus demand deposits.”

      And money is often considered other things as well depending on the person’s definition.

      How about the amount of medium of exchange is currency plus demand deposits?

      In M*V=P*Y, should the amount of medium of exchange be used for M?

      There are 2 things that can happen to demand deposits that can’t happen to currency (at least 2)? Name them.

      Based on that last sentence, is there a difference between “price inflating” with demand deposits created from debt and “price inflating” with currency from a budget and time perspective?

    3. I only got #3 wrong.

      Following a balanced budget rule in a slow down would require cutting spending as revenues fell which would get you to balance as both went to 0, right?

    4. montana says:

      On Q4:

      In a gold standard/Euro/whatever this is obviously true, but would not a sovereign government with a fiat currency be able to simply monetize the deficit, thus reducing both public and private indebtedness simultaneously?

      Besides, then the market would panic, currency would plummet and you might external surplus.

    5. pebird says:

      New Years resolution – no more questions with “maybe” as options. Or instead, only essay questions.

      Happy holidays!!

    6. bill says:

      Dear Warren (at 2010/12/25 at 23:31)

      Following a balanced budget rule in a slow down would require cutting spending as revenues fell which would get you to balance as both went to 0, right?

      Yes it would but the expenditure cutting would have to be discretionary (that is, you would have to choose where the cuts would be) while the automatic stabilisers were still working away undermining the plan to balance. The point is that fiscal rules still don’t alter the cycle and as long as you have some cyclical sensitivity within the budget outlays or income then the automatic stabilisers will be present.

      The alternative is that you might have a rule that says all spending would be proportionately lower across the board (in line with the declining revenue) and that would create even more difficulties – although it would make both sides of the budget equally sensitive to the cycle and nullify $-for-$ the usual net effect of the automatic stabilisers.

      A poll tax with no welfare payments would eliminate the stabilisation.

      best wishes
      bill

    7. Ray says:

      4 out of 6 this week, my record. (#2 and 3 wrong)
      Time to see if I can understand why now.
      Merry Christmas.

    8. Senexx says:

      HOLY !@#$ I got 5/5 or 5/6 – I got Santa wrong ;)

      I never go that well.

      Merry Christmas, Happy Holidays everyone.

    9. David H says:

      50% — but no, I’m not a neoliberal!

      Happy Holidays, Bill, and thanks for everything this year. I really enjoy your blog & have learned an invaluable amount from reading you.

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