Saturday Quiz – November 10, 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. Given the existence of a few nations that run large external surpluses, most nations run current account deficits. Under these conditions, the deficit nations operate within the constraint that national income movements will ensure that the two remaining sectors (government and private domestic) end up spending more than they receive, irrespective of the GDP growth rate.

2. Modern Monetary Theory (MMT) makes a crucial distinction between the issuer of the currency and the user of that currency. We learn that unlike a household which not only has to service its debt obligations over the course of the loan but also has to repay them at the due date, a national government debt, which issues its own currency can always roll over its "own currency" debt obligations and never has to pay them back.

3. Standing facilities (credit lines etc) that central banks maintain means that the monetary supply is always responding to changes in the monetary base.

4. Over the last two decades, there have been major redistributions of national income towards profits in many nations. This has arisen because inflation has run faster than the growth in nominal wages leading to larger profit margins.

5. Premium Question: Modern Monetary Theory (MMT) recognises that political constraints that governments operate within often override the intrinsic capacities they have as currency issuers. Accordingly, it recognises there is a trade-off between the need to run budget surpluses to reduce the public debt ratio and the political problems that austerity brings.

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