Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern…
Saturday Quiz – May 9, 2009
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 five questions. Your results are only known to you and no records are retained.
Quiz #8
- 2. If the central bank offered no return on overnight bank reserves then
- running budget deficits would force banks to stop lending because they would not want non-performing reserves.
- running budget deficits would drive overnight interest rates down to zero.
- running budget deficits would drive interest rates up because it would create a scarcity of available loanable funds.
- 1. If the central bank set the interest rate to zero then
- there would be no incentive for banks to lend for housing.
- there would be a huge build up of private debt because credit would be cheap.
- investment rates would reflect risk.
- 3. It is inevitable that public debt will rise in Australia under current circumstances given
- that the federal government knows that it would create hyperinflation if it didn't drain the funds.
- that the federal government has voluntarily imposed a rule that it will match all net spending fully with market-based debt issues.
- that the federal government does not want to increase the overall tax take given the depth of the spending gap it is trying to fill.
- 4. The Australian economy has in net terms generated 62.2 thousand jobs since February 2008, but unemployment rate has risen from 3.9 per cent to its current 5.4 per cent. This is because
- the labour force has contracted in the face of the global financial crisis discouraging workers to look for work.
- the dole conditions are too generous and there is a disincentive to work.
- the federal government deficit has not been large enough over the period.
- 5. The largest reason why China has grown so fast in the period 2004-2008 has been
- its huge population which gives it such a large domestic market.
- the strength of its government spending.
- the strength of world demand for its exports.
Sorry, quiz 8 is now closed.
scroll down to find the answers and explanation below.
Quiz #8 answers
- 2. If the central bank offered no return on overnight bank reserves then
- 1. If the central bank set the interest rate to zero then
- 3. It is inevitable that public debt will rise in Australia under current circumstances given
- 4. The Australian economy has in net terms generated 62.2 thousand jobs since February 2008, but unemployment rate has risen from 3.9 per cent to its current 5.4 per cent. This is because
- 5. The largest reason why China has grown so fast in the period 2004-2008 has been
Answer: running budget deficits would drive overnight interest rates down to zero.
Explanation: Please read The interest rate should be set to zero or post a comment for further discussion
Answer: investment rates would reflect risk.
Explanation: Please read Interest rates should be set to zeo or post a comment for further discussion
Answer: that the federal government has voluntarily imposed a rule that it will match all net spending fully with market-based debt issues.
Explanation: Please read Federal budget 2009 - ignorance will drive bad policy or post a comment for further discussion
Answer: the federal government deficit has not been large enough over the period.
Explanation: Please read A surprise every day employment rises! or post a comment for further discussion
Answer: the strength of its government spending.
Explanation: Please read Where the crisis means death! or post a comment for further discussion
Wow,first quiz (last wk) I got 80%, this wk 100%. I’m really getting the hang of this economics thing. My political compass results are – Economic Left/Right: -8.25 & Social Libertarian/Authoritarian: -6.21. Cheers AK
Dear Albert
So at least your one person who won’t be getting sucked into all this “debt palaver” that is filling the media columns and choking the air waves!
But just so you don’t get too confident, I will have to make the quiz harder next week.
best wishes
bill
5 out of 5. This stuff is begining to fall into place. Fascinating subject.
China introduced a massive stimulus plan targetted at public infrastructure and domestic production.
Hi bill
bill, i was under the impression that greenspans fed, and other central banks by reducing rates at a couple of points during the last decade to combat the remote risk of deflation at the time, led to the blowing up and continuation of a monstrous asset bubble, and a spurt in private debt.
why would that not have the same effect this time ?
wasn’t deflation just a ruse to lower the base rate to stimulate private debt expansion ?
Dear Tricky
Certainly the low rates provided the financial engineers with more scope to push debt onto the private sector. Clearly, the debt build up set up the knife-edge that the world has fallen off. Whether the low rates do the same thing now depends on other conditions. Critically, Clinton ran surpluses as did Costello here. During both periods, the private sector indebtedness sky-rocketed at the same time that the fiscal drag was squeezing private sector disposable income and forcing the sector to liquidate its bond holdings. Now we have strong deficits financing saving – a totally different environment.
Whether it was a ruse or not requires knowledge of information that I don’t have access to. I am not dismissing it though. I just cannot “prove” it.
best wishes
bill
Dear Tricky
The key factors in the housing bubble, and any asset price bubble for that matter, are the expectation of capital gain coupled with relaxed regulation. During the strongest run up in housing prices in the US, interest rates didn’t matter, since borrowers were taking out loans with no interest for some period with the expectation of refinancing or selling . . . without an expectation of a continued increase in house prices, these loans don’t happen. It was not completely unlike a call option on housing price increases. Similar things happened in the 1990s stock market bubble with higher interest rates, and in the 1980s commercial real estate bubble (S&L’s) with even higher interest rates. Expectation of capital gain and poor regulation were present each time; interest rates were not the determining factor, even as they may have contributed in some fashion during the 2000s housing bubble. Also, asset price bubbles were similarly not present during the period of comparatively low interest rates from the late 1940s to the mid 1960s.
Best,
Scott