Saturday Quiz – January 14, 2012

1. A falling wage share in national income, a characteristic feature of many advanced nations over the last few decades, indicates that workers' real living standards are being eroded in these countries.

2. Real wages increases require the rate of growth in nominal earnings to outstrip the growth in labour productivity.

3. Assume the central bank keeps the inflation rate steady and equal to the nominal interest rate. Under these monetary conditions it remains true that pushing the primary budget balance into surplus can drive down the public debt ratio even if the fiscal austerity causes a recession.

4. The government has to issue debt if the central bank is targetting, say a 3 per cent short-term interest rate and declines to pay a return on excess bank reserves.

5. Premium Question: The EU/IMF/ECB strategy for ailing Eurozone nations is twofold. First, engineer a cut in real wages to improve external competitiveness. Second, push the government back into surplus. The aim is for net exports to grow and replace the loss of spending arising from fiscal austerity. Suppose that the government announced it intended to cut its deficit from 4 per cent of GDP to 2 per cent in the coming year and during that year net exports were projected to move from a deficit of 1 per cent of GDP to a surplus of 1 per cent of GDP. If private sector deleveraging resulted in it spending less than it earned to the measure of 5 per cent of GDP, then the fiscal austerity plans will undermine growth even if the net export surplus was realised.