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Saturday Quiz – March 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. A program of fiscal austerity may not undermine attempts by the private domestic sector to reduce its indebtedness.



2. The public debt ratio is of no concern because it falls once economic growth resumes.



3. The money multiplier is in fact more correctly considered to be a divisor relating the monetary base to the money supply.



4. Only one of the following propositions is possible (with all balances expressed as a per cent of GDP):





5. Premium Question: The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance compared to a situation when it issued no debt.





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    This Post Has 14 Comments
    1. Regarding question 4, what do you mean by the private sector spending more than it is earning?
      Isn’t income equal to expenditure?

    2. @Senexx: I’m betting this question is highly motivated by the theme of “Right for the wrong reason equals wrong”…

      @ManMoTh: The private sector can spend more than it is earning by net borrowing. As an individual, you can take out a mortgage on your home and use that to spend more than your income. Conversely, it can spend less than it is earning by accumulating net savings.

    3. In the aftermath of the strong earthquake in Japan, I wish the Japanese people well. In the meantime, commentators in the media demonstrate their inability to think in terms of real resources: http://www.nytimes.com/2011/03/13/weekinreview/13limits.html?_r=1&hp

      Dr. Redlener, the author of “Americans at Risk,” about why the United States is not prepared for megadisasters and what we be done about it, said the biggest problem is a failure to go so far as even Japan has to protect its citizens from natural disasters.

      “We seem to not have the ability or the willingness to do that right now,” he said. “At a time when states are facing $175 billion in deficits and the federal government is trying to deal with very compelling issues of long-term debt and deficits, the likelihood of our being able to mobilize the resources to significantly improve disaster readiness is limited.”

      Of course, I wouldn’t be too harsh on Dr. Redlener, he is not an economist. It is a repeat of the kind of stories we heard after the disasters in Australia as well.

    4. Nicolai, thanks. I know that, but I don’t understand how it is related to the question.
      It seems to me that the question is related to the sectoral balances, but S-I does not
      correspond to earning minus spending. I guess I will have to wait for the answers.

      Andrea. As far as I know Allende had a sovereign currency although not a free floating
      one probably due to capital controls, etc. I don’t think there were many free floating
      currencies in the early 70s.

    5. MaMoTh:

      Income only equals expenditure when aggregated across all sectors. Imbalances occur within sectors. If the spender and the recipient of the spending lie in different sectors then income is not equal to expenditure within each sector, for that transacting pair.

      Govt deficit = non-govt surplus, etc.

    6. Paradigm thanks, I know that. Somehow I always get confused thinking income minus expenditure of the private sector is savings.

    7. MaMoTh

      I think you are correct, i.e. income minus expenditure of the private sector is “savings”, provided you mean “net private savings”, or S-I. Not sure if that was what you meant, though.

    8. Well, I got the first three right… I had no idea what either of the final two meant (and am none the wiser for knowing the correct answer) – does this mean I should add something to my score or subtract from it?

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