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Saturday Quiz – July 28, 2012

Welcome to the Olympic Games Opening Ceremony Version of 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 money supply is often defined to be the sum of currency on issue and demand deposits held in banks. The value of money declines if the money supply rises.

2. Economists note that the automatic stabilisers in the government's budget increase deficits (or reduce surpluses) in times of slack aggregate demand. This sensitivity of the budget outcome to the business cycle would not be eliminated if the government followed a fiscal rule such that it had to balance its budget at all times.

3. If the nation is running a current account deficit, then domestic households and firms and the government cannot simultaneously reduce their levels of indebtedness.

4. One advantage of low inflation is that the central bank can better use balance sheet management techniques to control yields on public debt at certain targetted maturities.

5. Premium Question: Modern Monetary Theory (MMT) demonstrates that a currency-issuing government has no intrinsic financial constraint and any constraints that are observed in practice reflect voluntary decisions by government to restrict their options. It remains, however, that the inflation risk associated with government spending would be higher if such a government stopped issuing public debt to match its deficit spending.

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    This Post Has 3 Comments
    1. Friend of the people, 2 out of 3 weeks, and a MMT soldier in between. Sustained effort reading this blog really helps.

    2. Darn it! I should have got friend of the state this week because I didn’t think a question through. I was saying to my self if the current account is in deficit, deficits=savings, they can save. Duh! The foreign sector can…..

    3. Well I got the first 4 right and while I respect the MMT position as far as I understand it – I do not consider myself a soldier.
      To number 5
      A goverment can just issue money cannot it not ?…forget about the debt , the CB and almost everything else.
      Just issue Treasury notes……..I imagine this would reduce the waste withen the system that some would call inflation……

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