Saturday Quiz – September 22, 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. If the national accounts of a nation reveal that its external surplus is equivalent to 2 per cent of GDP and the private domestic sector is saving overall 3 per cent of GDP then we would also observe:

2. In a currency-issuing nation, real surpluses must be expropriated from productive workers to feed the unemployed.

3. The British government's budget deficit has been rising despite the Government's stated fiscal austerity stance. We can conclude from the evidence at hand that the austerity mantra of the British government doesn't correctly describe its fiscal policy stance.

4. The impact on aggregate demand would be invariant between the government matching its deficit spending with private bond issues and the situation where the government instructed the central bank to buy its bonds to match the deficit.

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 2 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 2 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 4 per cent. In Year 2, the government stimulates the economy and pushes the primary budget deficit out to 4 per cent of GDP in recognition of the severity of the recession. In doing so it stimulates aggregate demand and the economy records a 4 per cent nominal GDP growth rate. The central bank holds the nominal interest rate constant but inflation falls to 1 per cent given the slack nature of the economy the previous year. Under these circumstances, the public debt ratio falls even though the budget deficit has risen because of the real growth in the economy.

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    7 Responses to Saturday Quiz – September 22, 2012

    1. Thanks for the quizz, Bill Mitchell, it’s a good challenge, helping us to get it right in every nook and cranny.

      The premium question was too much for me. I said false, because we know nothing about current account balances. I’m not sure of my answer.

    2. Habitual Input says:

      Hi Bill and bloggers!
      I don’t understand the answer to question 2, which I got wrong, I am guessing because of confusion on my part about the definition of real surpluses (or about the relation of stocks and flows). Especially if there are unemployed, is not some portion of the stock of real resources necessarily idle, and thus available for consumption by the unemployed? How is that “expropriation”? I imagine a state where the currently unemployed formerly “banked” a bunch of grain with the government, and now are permitted to consume these grain “savings”. Why would the unemployed have to consume the real surpluses of productive workers?

    3. Ben Johannson says:

      @Jean-Baptiste B,

      Damnit, I didn’t even take the foreign sector into consideration. I’m sure that’s why I missed the premium question with a “True” answer.

    4. Andy says:

      Correct me if I’m wrong, but the external sector was not relevant in my analysis and answer of Question 5.

      Public debt is a stock.

      A budget deficit is a flow which increases the size of public debt (in the current operational regime the government has a legal requirement to issue Bonds when it deficit spends).

      The maturation of Government Bonds is a flow which reduces the size of public debt.

      In year 2, Public Debt will rise by 4% of Real GDP (size of budget deficit) minus the amount of Government Bonds which reach maturity (and are not rolled over) that year.

      As GDP rises so does tax revenue. The coupon payments on and maturation of government bonds will have a decreasing impact on the budget deficit.

      I am still new to MMT, so my analysis could be entirely flawed. I think Bill mentioned the interest rate and the inflation rates and misdirects. Note that Bill stated that the budget deficit was a percentage of GDP, not Nominal ($)GDP. The fall in the inflation rate is already factored in as part of the calculation which determines Real GDP.

    5. markg says:

      Mosler often says QE removes interest income from the private sector and has a negative impact on AD. I got Q4 right because this is Bill’s blog. I personally don’t think there is enough info to answer the question. Are we looking at a snapshot in time or a time period? Is the central bank paying interest on reserves and is that rate higher or lower than the bonds the govt would have issued?

    6. pebird says:

      Habitual Input:

      Assume that all real output is generated from productive workers. Then by definition any transfer to unemployed workers is an expropriation from the class of productive workers. Does not matter if at one time you were productive, when you are unemployed you are provided output essentially expropriated from yourself (e.g., when you were productive).

      I got the answer wrong too, I was thinking that the expropriation could be gotten from the 1%ers, I missed the fact that they don’t produce anything real.

    7. Habitual Input says:


      Thanks for that clarification. I can see it holds true for the unemployed “as a class”.

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