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Saturday Quiz – June 18, 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. British real wages have fallen over the last year because the rate of growth in earnings has fallen behind the growth in labour productivity.

2. The US Federal Reserve's quantitative easing program ends this month. Most commentators agree it has not provided much stimulus. This reason for the lack of stimulus is because aggregate demand has not shown a sensitivity to interest rate reductions.

3. The Greek government has been accused of not pursuing its fiscal austerity program with sufficient commitment. The fact that the Greek government budget deficit continues to increase is evidence of this.

4. The inflation risk under a fiat monetary system is no different to that which prevailed under a convertible currency system backed by gold with fixed exchange rates.

5. Premium question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The outstanding public debt is equal to the value of the nominal GDP and the nominal interest rate is equal to 1 per cent (and this is the rate the government pays on all outstanding debt). The government's budget balance net of interest payments goes into deficit equivalent to 1 per cent of GDP and the debt ratio rises by 3 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 2 per cent of GDP and in doing so stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. All other parameters are unchanged in Year 2. Under these circumstances, the public debt ratio will rise but by an amount less than the rise in the budget deficit because of the real growth in the economy.

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    This Post Has 6 Comments
    1. “This reason for the lack of stimulus is because aggregate demand has not shown a sensitivity to interest rate reductions. ”
      I’m bamboozled by this being true since bond yields actually rose during QE2. So it may have been intended to cause stimulus by lowering interest rates but it not only failed to cause stimulus, it failed even to lower interest rates. Bond holders sold off bonds over and above the demand from government buying them up and commentators are saying that that over selling was in response to perceptions about QE2.

    2. Q2 and a little off topic.

      Here is what is wrong with most of the economics “profession” (a term to be used loosely)


      Andy Harless said…

      I should let David (who I don’t think is actually a Keynesian) answer for himself, but I, for one, would be happy to get the Fed entirely out of the business of dealing with real GDP. In my opinion, the only way to do that is to have the Fed target nominal GDP. Otherwise, the Fed’s policy, for example if the objective is to stabilize the inflation rate, has to compensate for expected changes in “input growth or TFP growth” so that spending will rise along with potential output. That should not be the Fed’s job. The Fed should be isolated from the real economy and only adjust the supply of money to the demand given a target path for nominal spending. To do so, however, the Fed has to make sure that its actions don’t change the demand for money in such a way as to offset its changes in supply, which means it has to buy something other than short-term government securities, which are nearly perfect substitutes for bank reserves. By a criterion that takes away the Fed’s involvement with the real economy, QE2 is not only necessary but woefully inadequate. And if adequate QE would result entirely in inflation rather than real growth, so be it: that should not be the Fed’s problem.

      June 17, 2011 1:44 PM”

      So QE until price inflation is say 4% with no real GDP growth and productivity of say 2% to 3%. It seems to me that means lower employment, fewer hours, less in wages, or some combination making most people’s budget negative in real terms. A truly awful and disgusting comment.

    3. FedUp, I totally agree. It smacks of people believing that because rises in the stockmarket are symptomatic of prosperity, inducing a stock market bubble will cause prosperity. A bit like a puppy having a wet nose is symptomatic of good health and so a moronic vet might wet the dry nose of a feverish puppy in an attempt to make it well again.
      The commentator claimed that expectations of Fed induced inflation would drive productive investment- totally drivel -they would drive commodity hoarding.

    4. stone, yes. I just wonder if most economists sit around thinking about how to make the rich richer and then come up with excuses for why that should be.

    5. FedUp “I just wonder if most economists sit around thinking about how to make the rich richer and then come up with excuses for why that should be.”

      -I get the impression more that the system is constructed by the rich in such a way as to make them richer. The economists would like to give the impression that the economists are in the driving seat- So the economists busy themselves with dreaming up “plausible” justifications for why they have designed the system the way it is -whilst in fact they are just trailing along behind:). The bizare thing is that we are all in thrall to the rich. I don’t see how ownership is such a unique talent that the “burden” of ownership can’t be successfully borne by all the “little people”. Management is a rare talent but many rich people employ managers to do the management. I guess people only see the choice as between government ownership and oligarchy. They plump for oligarchy as the least bad option and never ask why universal individual ownership isn’t on the table.

    6. I think the ‘natural’ tendency in nature and society is for entropy, a deterioration, increasing inequality undermining the system viz the higher saving rates in more unequal societies, the greater need for higher state net spending and the lower likelihood of it, MMT may not be perfect or everyone’s ‘cup of tea’ (facile rhyme) but it’s certainly a huge step for society in a better direction and organisation of society.

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