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Saturday Quiz – June 20, 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. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.

2. The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.

3. The private domestic sector can save overall even if the government fiscal balance is in surplus as long as the external sector is adding to total demand in the economy.

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    This Post Has 3 Comments
    1. 2/3 again.

      I got question 3 wrong because of this statement from the article : Seeking zero fiscal deficits is not a progressive endeavour

      To answer his question, a nation can safely run a fiscal surplus if the external sector is adding so much to spending in the domestic economy that the government can provide an appropriate level of services and the desires of the private domestic sector to save can be met.

      This statement and the answer seems to contradict each other ?

      I was really hoping to get 3/3 this week and studied hard for it.

    2. I think the False part, Derek lies in the fact that it is adding to total demand it doesn’t state if it is adding adequate demand to facilitate saving in the economy. It may be adding 10bn to the economy but if the surplus is 100bn this would mean the private sector would be dis-saving

    3. “as long as the external sector is adding to total demand in the economy”
      It depends on how big the current account/external surplus is, doesn’t it?

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