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Saturday Quiz – February 12, 2011

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 six questions. Your results are only known to you and no records are retained.

1. The central bank can influence the supply of money via the price it provides reserves to the commercial banks but this influence is compromised by the level at which it sets the target monetary policy rate.

2. If the private domestic sector spends less than it earns and the nation runs a small external deficit, then the government budget will always be in deficit at all levels of national income.

3. Under current institutional arrangements, a central bank can easily purchase treasury debt directly to satisfy accounting arrangements relating to the national government’s budget deficit (that is, "monetise the deficit") while still targeting a positive short-term policy rate.

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 spending and private consumption 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: 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. Governments that promote fiscal austerity claim they can reduce the the public debt to GDP ratio by pushing the primary budget into surplus even if the public spending contraction creates a negative real GDP growth rate. Under the circumstances outlined, this claim is correct.

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    This Post Has 3 Comments
    1. Alex,

      I think the stress on current arrangements was on payment of interest on reserves.

      One technicality:

      Actually, central banks do buy government securities at auctions.

      “the Federal Reserve is prohibited by law from adding to its net position by direct purchases of securities from the Treasury that is, the Federal Reserve has no authority for direct lending to the Treasury. As a consequence, at most the Desk’s acquisition at Treasury auctions can equal maturing holdings” – Michael Akhtar, Understanding Open Market Operations, Federal Reserve.

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