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Saturday Quiz – August 6, 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. With fiscal austerity now in vogue, Modern Monetary Theory (MMT) would not dispute the argument that workers might endanger their employment prospects by demanding real wages growth at present.



2. A Eurozone nation like Greece that runs a persistent current account deficit cannot sustain rising living standards over time given that the ECB chooses to maintain rigid control of the inflation rate.



3. The Balanced Budget amendment being proposed in the US where the federal government would have to match revenue and spending in each fiscal year ensures that discretionary government spending will always be pro-cyclical.



4. A balanced budget amendment in the US would ensure that the private sector debt levels would rise in the current circumstances.



5. Premium Question: In Year 1, the economy plunges into recession with nominal GDP growth falling to minus -1 per cent. The inflation rate is subdued at 1 per cent per annum. 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 fall because of the real growth in the economy.





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