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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.

1. If the central bank set the interest rate to zero then

2. If the central bank offered no return on overnight bank reserves 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

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    This Post Has 7 Comments
    1. 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

    2. 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

    3. 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 ?

    4. 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

    5. 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.


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