Saturday Quiz – June 13, 2015

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. We are told that a country is running a very small external deficit and that the private domestic sector is spending less overall than it is earning but relative to GDP this balance is smaller than the external deficit. Without knowing the relative magnitudes of these balances, we cannot conclusively determine whether the government is in deficit or surplus.



2. Government bonds constitute a form of wealth held by the non-government sector and thus the overall non-government sector wealth rises when the government issues bonds to match its deficit spending.



3. When a government records a fiscal surplus, which means it is withdrawing more purchasing power from the economy than it is adding, we know that it is seeking to attenuate the growth in aggregate demand to avoid the risk of inflation.





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    5 Responses to Saturday Quiz – June 13, 2015

    1. Bob says:

      Q2, the interest on bonds will add to wealth?

    2. Bob says:

      Bill,
      “If government typically has few investment opportunities with NPV greater than the borrowing rate and taxes fall mainly on consumption and one thinks that taxpayers are irrationally under-saving, then it would be good for the government to run surpluses so the private sector could invest more than it saves. Is this what Mr. Osborne has in mind? ”
      I don’t know how to respond.

    3. Derek Henry says:

      I’ve been at this for 9 months and only got 100% once.

      2/3 again.

      Is question 2 a trick question ?

      I.e. They can buy their own debt like in Japan thus the overall non-government sector wealth does not always rise when the central bank issues debt ?

    4. Derek Henry says:

      Alright Bob,

      Then it would be good for the government to run surpluses so the private sector could invest more than it saves. Is this what Mr. Osborne has in mind? ”

      I think I got the answer to this from a few posters on Mondays blog in the comments section when I was trying to understand sectoral balances.

      I think this would only work if we were at full employment or getting close to it and the economy was booming. This would be one of the times when the private sector would invest more than it saves and borrows to invest thus in a deficit on the sectoral balance graph along with a goverment surplus.

      Problem with Osbourne is he follows mankiw to a tee who when describing Classical Quantity Theory of Money.

      MV = PY

      V is the velocity or the times the stock turns over per measurement period.

      P is the price level.

      Y is the real output level.

      They both assume that Y will always be at full employment and V is constant and fixed. Insanity !

      This is why the neoliberals always do things arse over tit in the cycle.

      So yes this is what Osborne has in mind but it will be a disaster as we are not at full employment or anywhere near it.

    5. syzygysue says:

      My problem with 3. is the phrase ‘… we know that it is seeking to attenuate the growth in aggregate demand to avoid the risk of inflation.’

      In the case of the UK and George Osborne, ‘we know’ that there is a difference between what he says he is ‘seeking to do’ and what he is actually ‘seeking to do’. The dilemma, in answering the question, lies in the word ‘seeking’.

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