Saturday Quiz – June 6, 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 #12

  • 1. An ever expanding budget deficit is likely to be inflationary
    • only if it is not accompanied by proportional increases in borrowing.
    • when it increases nominal demand beyond the saving desire of the non-government sector.
    • because it adds to bank reserves and thus allows them to extend more credit which results in too much money being in the system.
  • 2. The Australian government is in a better position to weather this current crisis and expand the deficit
    • because it inherited a very low level of public debt.
    • because it can enforce tax obligations in $AUD on its citizens and the currency trades internationally at market-set parities.
    • because it has taken a cautious approach by not favouring business or unions.
  • 3. BHP builds its business by borrowing and investing in assets which allow it to earn an economic rate of return. Most commentators applaud this level of entrepreneurship. The analogy
    • also applies to the national government as long as it is earning a positive return on the projects it borrows against.
    • does not apply to the national government because its investment decisions are not disciplined by the private market which forces funds to be efficiently deployed.
    • does not apply to the national government because unlike BHP, its spending is not constrained by available revenue.
  • 4. The projected budget deficit is $58 billion next financial year. It is likely that this injection will be
    • inflationary if the private sector reacts to it and the lower interest rates and expands borrowing.
    • deflationary because the potential output is growing faster than projected output (as evidenced by the Budget growth projections for GDP, labour productivity and the labour force).
    • deflationary because the banks are not prepared to pass on the full central bank interest rate cuts.
  • 5. Commercial banks should applaud the government going into deficit because
    • they provide net additions to bank reserves which increase their capacity to lend.
    • they finance non-government saving which means the banks get more deposits which means they can expand credit to make profit.
    • they generate an optimistic environment for investment which increases the proportion of credit-worthy customers.

Sorry, quiz 12 is now closed.

scroll down to find the answers and explanation below.















Quiz #12 answers

  • 1. An ever expanding budget deficit is likely to be inflationary
  • Answer: when it increases nominal demand beyond the saving desire of the non-government sector.

    Explanation: Please see A response to (green) critics - finale (for now)! for more information. If you are unsure ask a question via the comments.

  • 2. The Australian government is in a better position to weather this current crisis and expand the deficit
  • Answer: because it can enforce tax obligations in $AUD on its citizens and the currency trades internationally at market-set parities.

    Explanation: Please see Debts and deficits again! for more information. If you are unsure ask a question via the comments.

  • 3. BHP builds its business by borrowing and investing in assets which allow it to earn an economic rate of return. Most commentators applaud this level of entrepreneurship. The analogy
  • Answer: does not apply to the national government because unlike BHP, its spending is not constrained by available revenue.

    Explanation: Please see Debts and deficits again! for more information. If you are unsure ask a question via the comments.

  • 4. The projected budget deficit is $58 billion next financial year. It is likely that this injection will be
  • Answer: deflationary because the potential output is growing faster than projected output (as evidenced by the Budget growth projections for GDP, labour productivity and the labour force).

    Explanation: Please see Debts and deficits again! for more information. If you are unsure ask a question via the comments.

  • 5. Commercial banks should applaud the government going into deficit because
  • Answer: they generate an optimistic environment for investment which increases the proportion of credit-worthy customers.

    Explanation: Please see A response to (green) critics - finale (for now)! for more information. If you are unsure ask a question via the comments.

This Post Has 0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Back To Top