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The Weekend Quiz – November 18-19, 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. Larger fiscal deficits as a percentage of GDP typically mean that there are less real resources available for other productive uses.

2. For a nation running a current account deficit, national income adjustments will ensure government fiscal balance is in deficit if the private domestic sector seeks to increase its saving overall as a percentage of GDP.

3. If the central bank pays a positive interest rate on overnight reserves then it no longer would have to conduct open market operations to ensure its policy rate is sustained (ignore any reserve requirements).

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    This Post Has 5 Comments
    1. Regarding Question #2:

      If, for example, a nation has a current account deficit of 2% of GDP and the private domestic sector has a deficit of 5% of GDP; then, the government would have a surplus of 3% of GDP. The private domestic sector seeking to increase its savings overall might just mean reducing its deficit to 4% of GDP, which would only reduce the government surplus to 2% of GDP, not push it into deficit.

    2. Hello Greogry Long,

      Oh I hadn’t thought about that situation.

      However, reducing the surplus is moving in the same direction as increasing deficit. You are right that it does not necessitate fiscal balance going negative.

      I think its quite rare to have the case you put forth in real life though.

    3. Okay.

      The phrase increase savings overall implies that there was already a surplus and now the sector is increasing this surplus even further.

    4. Clearly I need MMT university, cause I think I know things and then clearly the nuances of the questions escape me…
      I got 2 okay. Assuming the CAD didn’t decrease with the increase in private sector savings and that the government was already in deficit – i.e. 1=0+1 becomes 2=1+1 (g-t=s-i – x-m).
      Number 1 I guess I was thinking of crowding out when I put “false”. So MMT argues that an increase in the deficit does not cause financial crowding out (because investment is not dependent on loanable funds and because bond sales are liquidity management tools not the revenue that funds the deficit). But yes I suppose the point of a deficit is to mop up the underutilised real resources like unemployed labour. I hope I am on the right track there.
      Number 3 I said true cause I thought MMT argued that a positive return on reserves would negate the need for open market operations but then I am now wondering if just any old positive return isn’t good enough, it needs to be at the target rate?? Anyway I am always humbled by these quizzes. I can’t wait for the text book so I can start again from the beginning getting all the conceptual stuff ironed out.

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