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The Weekend Quiz – October 8-9, 2016

Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention or not to the blogs I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. If calibrated correctly, quantitative easing (QE) programs run by central banks can replace the net financial assets held by the non-government sector, which are destroyed by fiscal austerity programs.

2. The expansionary impact of deficit spending on aggregate spending (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 government is attempting to stimulate the economy via a discretionary expansion of the fiscal deficit. The private market orientated advisors tell them to cut taxes and 'privatise' the expansion whereas the more civic-minded advisors argue that there is a need for improved public infrastructure which requires increases in government spending. So imagine that the government is choosing between a tax cut that will reduce tax revenue at the current level of national income by $x and a spending increase of $x. Which policy option will have the greater initial impact on aggregate demand?

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    This Post Has 3 Comments
    1. I got the answers correct, but I was tempted to answer true for #1 because one might imagine a central bank offering to buy government bonds at double their current market value. It would be difficult to argue that the sellers had made a simple exchange of equivalent assets as MMT often asserts for such transactions. If one assumes that the level of demand for bonds affects the transaction price, then even normal QE likely has the effect of enriching sellers to some degree.

    2. I got 2 out of 3 right, but I got the 3rd one right, which I was not sure about, and the 2nd one wrong which I was (incorrectly) sure about (although thinking back to a blog article or two, I have a rough idea why I was wrong).

      These quizzes are great, and should be compulsory for (among others) Jeremy Corbyn and John McDonnell.

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