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The Weekend Quiz – December 3-4, 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. Assume the central bank keeps the inflation rate steady and equal to the nominal interest rate. Under these monetary conditions it remains true that pushing the primary fiscal balance into surplus can drive down the public debt to GDP ratio even though the fiscal austerity causes a recession.

2. The government has to issue debt to match its fiscal deficit if the central bank is targetting, say a 3 per cent short-term interest rate and declines to pay a return on excess bank reserves.

3. A typical IMF export-led strategy is to propose cutting real wages in order (they say) to improve external competitiveness and pushing the government into fiscal surplus via austerity. The aim is for net exports growth to more than offset the loss of spending arising from fiscal austerity. Suppose that the government announced it intended to cut its deficit from 4 per cent of GDP to 2 per cent in the coming year and during that year net exports were projected to move from a deficit of 1 per cent of GDP to a surplus of 1 per cent of GDP. If private sector deleveraging resulted in it spending less than it earned to the measure of 5 per cent of GDP, then the fiscal austerity plans will undermine growth even if the net export surplus was realised.

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