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Saturday Quiz – July 21, 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 central bank sets the short-run interest rate and as part of its liquidity management functions can pay any rate on excess reserves held by the commercial banks that it chooses.

2. When a currency appreciates strongly against key trading partner currencies due to the strong demand for certain exports (say mining output), the result drop in international competitiveness squeezes export industries which are not enjoying a commensurate growth in world demand. Cutting domestic wages and the rate of inflation would restore competitiveness in the industries that are under pressure.

3. Aggregate demand is the sum of all spending components (consumption, investment, government spending, and net exports). In a stock-flow consistent macroeconomics, we know that flows during a period add to relevant stocks. For example, if the flow of consumption spending rose by $200 billion in total in any one year, then if nothing else changes the stock of aggregate demand would rise by the same amount in the first instance (before the multiplier starts to work).

4. Modern Monetary Theory (MMT) demonstrates that mass unemployment arises from deficient aggregate demand which calls for an increase in the budget deficit to correct the deficiency. This observation is at odds with a policy prescription which aims to cut real wages relative to productivity.

5. Premium Question: If the nation is running a current account deficit of 2 per cent of GDP and the government runs a surplus equal to 2 per cent of GDP, then we know that at the current level of GDP, the private domestic sector is not saving.

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