Saturday Quiz – May 23, 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. The Australian Treasury equates the NAIRU with full employment and uses this to calibrate their structural deficit estimates. Accordingly, these deficit estimates will be




2. A national spending gap will emerge if desired domestic saving suddenly exceeds domestic investment. The sectoral balances relationship (from the national accounts) shows that




3. The experience of Norway with its strong net exports contribution shows that




4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will




5. The Government could stimulate employment growth by cutting real wages across the board (which would not alter wage relativities unfairly)






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    This Post Has 2 Comments

    1. Hi Bill,

      I got question 4 wrong.

      “4. The rising public debt levels that we are seeing will have to be paid back as the debt matures. These payments and the associated interest servicing will”

      My interpretation is the interest servicing of government debt increases the size of government deficit spending and this will decrease the spending gap. I picked “reduce the room for other non-inflationary discretionary deficit spending because they will “fill up the spending gap” more quickly” rather than the correct answer. Any help on where I went wrong would be appreciative.

      Cheers,

    2. PLEASE DO NOT READ UNTIL YOU HAVE DONE THE QUIZ

      Dear Anthony

      Yes, it was a trap. If nothing else changed this would clearly be the case. Repayment and interest-servicing of the debt are government spending just as building a bridge or paying some supplier. The spending occurs in just the same way – crediting bank accounts and/or writing a cheque. So if the government can pay the supplier of pens to the Treasury then it will also be able to pay back the debt as it matures given it is not revenue-constrained. There is never an insolvency issue.

      But then what impact does the spending have? Well it stimulates nominal aggregate demand, which in turn increases national income. As part of that increase leakages via imports and saving occur, which increase the “spending gap”. So it is likely that the “room to inject nominal aggregate demand” will not be squeezed by the increasing debt servicing obligations.

      The question is an “modern monetary” application of the sectoral balances logic.

      I hope that helps.

      best wishes
      bill

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