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Saturday Quiz – March 24, 2012

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

1. The private domestic sector cannot save if a nation's external sector is in balance (and thus making no contribution to real GDP growth) and the government runs a balanced budget.

2. If we observed yields on 10-year bond yields rising it would be incorrect to conclude that bond markets are demanding increased risk premiums for these assets.

3. If the household saving ratio rises and there is an external deficit then government must increase net spending to fill the private spending gap or else national output and income will fall.

4. Modern Monetary Theory challenges the notion of the money multiplier but still accepts that continually expanding the money supply will inevitably be inflationary.

5. Premium question: By voluntarily issuing debt to match its net spending, government borrowing from the private sector reduces the risk that public deficits will be inflationary.

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    This Post Has 4 Comments
    1. Hello,i have a few questions to make if you dont mind,just out of the need to understand MMT better.

      Fist,if im correct,in MMT a large role is being played by the assumption that money must be spent first before the government is able to tax.This seems logical but i dont understand why couldnt it happen a little differently.
      I’ll give a very simple example.Consider that you have a barter economy,comprised by 2 people that each one is able to produce one type of vegetables/fruits.Person A produces tomatoes,Person B produces Bananas.They are able to produce 5 units every day and consume all of them too.So every day you have 5 tomatoes and 5 bananas.They also believe that 1 tomato is equal to 1 banana and based on this “exchange rate” they trade their production.One day they decide they want to replace their system with a monetary one (i know its stupid but i think its irrelevant to the point).So here comes the government.

      They decide that they will call their currency dollar and also agree that 1$ = 1 tomato = 1 banana.We already assumed that they produce 5 tomatoes and 5 bananas so we can say that their economy has a daily and stable gdp of 10$ a day.
      Now if i understand MMT correctly,the government should buy their production so that the currency can start circulating in the economy?Why cant the government simply mint 10 coins of nominal value 1$ each and just hand it to them (they get 5 coins each) so that they can start trading ?In other words why cant the government simply give them the amount of money that is equivalent to their output?(well to be correct they could do the job with less than 10$ if they didnt trade their whole production)
      Furthermore if we assume that along with the government comes a bank,why cant they first get a loan by the bank (which means money comes into circulation) and get taxed later,which results in government taxing without having spent first?

    2. Crossover: Your examples & thinking are basically consonant with MMT.

      Now if i understand MMT correctly,the government should buy their production so that the currency can start circulating in the economy. This is not. The government can do whatever it wants. Like giving A or B whatever number of coins it wants, for fruit or for nothing, as you propose. It could even give A & B fruit, if it has a strategic fruit reserve. Only thing it can’t do is buy more fruit from A & B than A & B have. They’d have to sell fruit bonds, fruit futures & fruit derivatives designed on Fruit Street to get more coins.

      The trivially true but fundamentally important MMT, chartalist, monetary analysis point is that the nongovernment can’t pay taxes until the government provides it with the stuff to pay taxes with, which we call coins, currency, money, government debt etc. The government could provide this stuff however it wants, through purchases, through gifts, through loans through a bank as you suggest.

    3. Some guy thank you.
      i figure out it was the word “spend” that was bugging me.9 times out of 10 when i read about MMT i read that the gvt needs to “spend” the money before it can tax…and i relate spending with a kind of transaction.

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