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Saturday Quiz – June 28, 2014

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. The automatic stabilisers built into the fiscal framework always work in a counter-cyclical fashion and if not unencumbered by discretionary policy changes, such as fiscal austerity, will eventually ensure that the government fiscal balance returns to its appropriate level.

2. The decision by the government to issue debt to the non-government sector to match its fiscal deficit instead of selling the same debt to the central bank:

3. The ability of a central bank to target a positive interest rate as an expression of its monetary policy stance is independent of the volume of debt it might purchase from the treasury (via primary issue) to match the government's fiscal deficit.

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    This Post Has 4 Comments
    1. Bill,

      The word liquidity does not seem to fit within question three. The question makes far more sense without it.


    2. Sorry for the stupid question, but is purchase of government debt through primary issue the same thing as “monetizing the debt”? Terminology is really confusing. It’s little wonder that no one understands the money creation process when almost no one can say where bank reserves come from in the very first instance. Try googling that and getting an actual answer.

    3. Dear Jeff (2014/06/28 at 13:22)

      There are no ‘stupid’ questions around here. I try to not use too much jargon without explanation but sometimes I fail. Sorry. Governments issue new debt via the primary market, which is made up of a select group of traders who tender for the issue at an auction. That is called primary issue. The debt is then freely traded on the secondary market where all manner of people and institutions bid to hold or sell it. When the central bank conducts open market operations (including quantitative easing) it trades in the secondary market.

      The government also sells some debt to the central bank directly and that is referred to as “monetising the debt” because the central bank credits the treasury’s account it holds with the central bank in return for the debt.

      best wishes

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