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Saturday Quiz – September 29, 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. Assume a nation is running an external surplus equivalent to 2 per cent of GDP and the government manages to run a budget surplus equivalent to 1 per cent of GDP. The national income changes associated with these balances would ensure that the private domestic sector was running an overall deficit of 1 per cent of GDP.

2. Starting from the external situation in Question 1, with the surplus being the equivalent of 2 per cent of GDP but this time the budget surplus is currently 2 per cent of GDP. If the budget balance stays constant and the external surplus rises to the equivalent of 4 per cent of GDP then you can conclude that national income also rises and the private surplus moves from minus 2 per cent of GDP to plus 2 per cent of GDP.

3. If all bank loans had to be backed by reserves held at the bank (a 100 per cent reserve requirement) then the capacity of the banks to lend would be more constrained which would help maintain financial stability.

4. A sovereign currency-issuing government needs to raise tax revenue to implement and provision its socio-economic agenda.

5. Premium Question: Assume a nation's central bank successfully maintains a zero interest rate policy and recession keeps the inflation rate at zero. Under these circumstances a fiscal austerity program can achieve reductions in the public debt ratio even if the movements in the automatic stabilisers that result from the recession that the austerity causes tax revenue to decline.

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    This Post Has 3 Comments
    1. I got the premium question right so I may be allowed to ask one dumb question: Could you elaborate on Q#3 and Q#4 a bit? I just don’t get them both (although I really, and I really mean “really”, don’t view myself as a “neo-liberal”). @ #3: Are there no constraints or would constraints not help stability? And @#4: Why “raising” taxes? You need to tax for your currency to work, ok, but why “raising” taxes when there’s no mention whatsoever about the tax rate beforehand plus no specifics about the planned “socio-economic agenda”? Or am I just too much of a nit-picker here with regard to wording?

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