The Weekend Quiz – September 16-17, 2017

Welcome to The Weekend 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. When a sovereign government issues debt to match its fiscal deficit the debt adds to the financial wealth of the non-government sector.



2. Ignoring any reserve requirements that might be imposed, if the central bank pays a positive interest rate on overnight reserves held by the commercial banks then it may still have to conduct open market operations as a means of ensuring that levels of bank reserves are consistent with its policy target rate of interest.



3. If participation rates are constant, percentage unemployment will not change as long as employment growth matches the pace of growth in the working age population (people above 15 years of age).





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    9 Responses to The Weekend Quiz – September 16-17, 2017

    1. Derek Henry says:

      Can’t wait to see the answer to question 1.

      Interest income channels as there is always more savers than borrowers. I’m pretty sure Warren and Stephanie (Kelton curve) are going to disagree with the answer.

    2. Derek Henry says:

      If you analyse the U.S. daily treasury statements and banking statements.

      The non government sectors wealth has increased by $40 billion since the FED started increasing interest rates via the interest income channels.

    3. Derek Henry says:

      Plus increasing interest rates = increased bank deposits

    4. Jerry Brown says:

      Derek Henry, if the government issued debt at a negative rate of interest (like Japan has been doing) would you then say it was decreasing the financial wealth of the private sector?

      On question 3 – I got it wrong but have problems with the wording of the question. It seems to me that “employment growth” is an actual ‘stock’ number, not a rate. And that “pace of growth in the working age population” is a rate. So that if the employment growth in the US was 75,000 jobs in a particular month that number will not “match” the rate of growth in the working age population which might be, I don’t know, .2% for that month for example. Maybe I’m overthinking this, or maybe just confused. The quizzes do that to me often…

    5. Alan Longbon says:

      Derek,

      It is a portfolio change so there is no net change to wealth. The stock of savings in the private sector moves into a bond for a time from wherever it was before, then moves out again when the bond matures.

      You are right about the interest income though it is a net add to bondholders in the private sector when generated and paid.

      Best

      Alan

    6. CharlesD says:

      Derek While Alan addressed. I’ll repeat and clarify what I think is the correct answer. It is the higher deficit which increases the wealth of the private sector. As Alan explained, the issuance of securities does not directly impact this increase.

    7. Lance says:

      Three out of three! I’m back to being a serious dude!

    8. Jerry Brown says:

      Dude! Congrats!

    9. Mark Kinnear says:

      I got number 1 wrong – the new dollars coming in add to the wealth – as the dollars replaced by bond issuance is still a value to the non govt sector

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