The Weekend Quiz – January 20-21, 2018

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. The central bank can influence the supply of money via the price it provides reserves to the commercial banks but this influence is compromised by the level at which it sets the target monetary policy rate.



2. If the private domestic sector spends less than it earns and the nation runs a small external deficit, then the government fiscal balance will always be in deficit at all levels of national income.



3. A central bank can easily purchase treasury debt directly to satisfy accounting arrangements relating to the national government’s fiscal deficit (that is, "monetise the deficit") while still targeting a positive short-term policy rate.





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    19 Responses to The Weekend Quiz – January 20-21, 2018

    1. Lance says:

      One out three! I’m sliding into the pit of neoliberalism!

    2. CS says:

      Oh dear. You think you know….but you don’t… Alas my brain is not agile enough to master the various permutations … Waiting for explanations is a kind of torture! I often get confused about how gdp levels work with sectoral balances… Is there something where you can see a simplified set of accounts…

    3. CS says:

      Confused, cause nz for example has a private sector that spends more than it earns and an external deficit but a fiscal surplus…hmmmmmm

    4. Curt Kastens says:

      NO I can not answer these questions. They raised a question of my own. I am not an economist so humor me and explain why a central bank is even neccessary and not just an expesive welfare program for white ivy league graduates?
      Then there is the question of inflation that these central banks are supposed to protect us from. 40 years ago a man worked, saved a thousand dollars, put that money in the bank and forgot about it.
      Should society value the work that man did 40 years ago the same as if it did yesterday? Since I am new with MMT I do not know if MMTers are pointing out what some people on further reflection might consider advantages of inflation. But if MMTers are not doing this should they be? Or would it be a politcally losing move?

    5. Chris says:

      I feel like the answer to number (2) is wrong.

      If the private sector runs a deficit of X and the country has a small external deficit of Y, then as long as X > Y, X-Y is equal to the government sector surplus.

      Please correct my logic if I am wrong.

    6. Chris says:

      I realise my logic above is mistaken but not my belief that the answer is wrong.

      If the country runs a small external deficit then the sum of its private sector deficit + government fiscal balance is in deficit.

      Following this logic if the government sector surplus is lower than the private sector deficit then the country as a whole can still remain in deficit viz. the rest of the world. I don’t understand why the above condition requires the government fiscal balance to be in deficit.

    7. Eddie Baker says:

      The answer to Q2 should be false, not true. If the wording were “…domestic sector spends less than it earns…” then it’d be true.

      Curt,

      CBs aren’t necessary, and some MMTers recommend folding their useful activities into treasury operations. Inflation is preferable to deflation, since in a deflationary environment fixed nominal obligations can become crippling.

    8. Tom says:

      Curt Kastens,

      I will try to do my best to answer your questions above. 1 out of 3 on this test (I’m back to being a neoliberal now).

      Central bank is the lender of last resort to protect against bank runs. It is the bank of a nation’s treasury (government) so if you want a government that can provide safety net programs and implement national health care, then you need a central bank to do that. Any jobs program will require central bank operation; without a central bank, we would have bank runs and permanent recession or even an inability to join WWII to help the Soviets fight the Nazi’s. >=|

      “an expesive welfare program for white ivy league graduates?” The FED is? I didn’t know FED employees are rolling in it! A society can choose to pay certain people less if it chooses. Our governor Jerry Brown cut his own salary, so just do what he did if you think FED employees are paid too much!

      In terms of inflation, it comes from too much money chasing too few goods. Taxes slows down the economy by removing spending power.

      Side point: What about asset price inflation though? What about monopoly rent? People don’t mention those things making medicine cost arms and legs and a basic apartment in Los Angeles taking >50 percent of my darn paycheck.

      The central bank listens to government policymakers, so I don’t really know if they are there to protect us from inflation in general. Last time i checked, the FED didn’t approve a 700 billion USD military budget, congress did. They followed orders from the rest of the government. Private sector spending can cause inflation too, and central bank most certainly doesn’t have a direct role in how much lending private sector does. Central bank doesn’t have any role to influence people bidding prices of something up either.

      Billy blog has plenty of inflation blogs, I think we should look at them first before saying there is no answer. Its likely to have answers. It does take time to learn MMT, so you have to slow down and keep reading. =)

      The question of valuing certain jobs or not is a political choice, right? You can give some people T bills with ridiculous interest rates or something if they managed to save the world.

      You think that the government should fight inflation first? But we know inflation doesn’t just happen with government spending, any type of spending can cause inflation.

      There are so many moving parts, I doubt that we can put all the problems on the central bank. Are you one of those people who has a FEDish with the central bank? (sorry, I had to. =)

      If I get something wrong, please someone point it out!

    9. Curt Kastens says:

      Dear Tom,
      Ok I must be really dumb when it comes to economics because if a central bank is needed to prevent banking runs why do we need a huge beuracracy for that. Almost all economic transactions require nothing more than a data operator making some data enteries in to a computer. I would think that at most 5 maybe even 3 people in a small office with no windows at the treasury department could make the neccessary book keeping enteries to to prevent banking runs. Heck back in the days of the gold standard people in Switzerland had to physically move gold from the Geman accounts room to the Portugese or Swedish accounts room when Germany bought raw resources to be able to continue to wage war. But money is not made out of gold anymore it is virtual, even before bitcoin.
      So instead of having a small department in one place there are 10 (?) intermediate offices of the Fed spread around the US each with a director and a staff of people that you say are needed to fund government projects.
      Is that really the way government projects are financed. Here I was under the impression that the Fed loans money to the Government, already one unneccessary step, then the government gives it to its departments and agencies which then give it to contracting offices which make contracts with private businesses.
      So unless that is not the way it works then the Fed is clearly a welfare program for rich white people.
      But more importantly it plays an crucial role in the machinery of smoke and mirrors used by those in power like the wizard of oz to provide cove stories to be able to persue policies in the intrests of small groups of people rather than the general welfare.
      As far as inflation goes, if you thought that I was saying that government should fight inflation first I wonder how you arrived at that conclusion. I only posed a very broad question. I was actually hoping that if people thought about that question they might reach the conclusion that a certian amount of inflation is a good thing. In fact the higher the inflation rate is the better, for those who have borrowed money anyways, of course for lenders it is a bad thing unless it has been pegged to the rate of inflation. Of course it is commonly accepted among the people that I know that physical goods do not have the same rate of inflation as money. Some physical items maintain their value compared to the general rate of inflation and some lose or gain relatively. That is all economics 101.
      There fore I am currently of the opinion that there is no rate of inflation that is inherently better than any other rate of inflation until the type of inflation that Germany had in the 1920s or something similar.
      From my current pint (lager?, ale?) of view, If inflation is so high that what a worker was paid for work from a year ago has no value today that seems to me as much a legitimate outlook as to say that what a worker did 40 years ago should have equal value today. The consequences of an inflation rate, what ever they are, good for some people and bad for others For a government to try to maintain some level of inflation because it brings “STABILITY” is as much smoke and mirrors as trying to set a national savings rate. Even Milton Freidman claimed that there was no savings rate for an economy which was better than any other savings rate.
      What Milton said made sense because if a family saves money it might buy a cabin cruiser to motor around the lakes of Michigan, Wisconsin, and Minnesota rather than buying two canoes and two snow mobils. If lots of other people make the same decision it will affect certian industries with in the country but the net national effect is likely to be minimal. Should people not think about inflation in the same way?
      Yes I do have something against the fed for the reasons that I just pointed out. Ok in the Grand scheme of things its financial impact with a budget of like 50 billion the last time that I check which was some years ago it is not great in an economy of trillions. But its effect in confusing things for the American people is huge. Then just think about this, we have policemen thinking that they did a great job in protecting the American people by arresting a bank robber who steals 20 grand and a repossed auto from a bank, maybe not in that order. Yet we have an agency that is not really needed raking in 50 billion through what are essentially fraudulent means. OK technically some people know what is happening but they do not really understand what is happening therefore it is fruad in my book. In my book a 50 billion fraud is something to be irrate about. The US defence department is infantly worse but that is another Grimm tale.

    10. Derek Henry says:

      The Minskys has a nice piece on sectoral balances which is a good learning tool.

      https://theminskys.org/usa-2017-q1-sectoral-balances-update/

      I think with question 2 what would throw many people is they ignored the word “small”. As you can see just after 2000 in the US. They had a private sector deficit, trade deficit but a government surplus. However, the trade deficit was “large”.

    11. bill says:

      Dear Eddie and Chris and all other quiz takers (at 2018/01/20 at 2:17 am).

      Thanks for the observation (which is correct). There was a typo in the question. It should (and now does) read “less” not “more”.

      Sorry. I was in a rush.

      best wishes
      bill

    12. Mark Kinnear says:

      Curt

      1) To say that “some inflation is a good thing” and but say that work done 40 years ago should be of the same value today is contradictory, especially when you go on further to say that the higher the inflation rate the better for a person borrowing … well not when he is paying higher interest rates.
      2) The govt spends by creating fiat dollars – the increased dollars amounts in the banking system create downward pressure on interest rates.
      Bonds are issued to drain the excess dollars which make it looks like the central bank is lending to the govt but all it is doing is swapping assets of different liquidity to stablise the cash rate.
      3) I do not know why you told us about Friedman – he works have been debunked by the economics community – and you your point didn’t make much sense.
      4) As for frauds it is quite well known that the ruling class have things to suit themselves – the top 1% dont own over half the global wealth by accident.
      5) MMT describes the monetary system as it is – political parties runs the financial system the way they want to suit their own ideology.

    13. CS says:

      Oh good. I do understand sectoral balances after all! Self confidence restored!

    14. Lance says:

      Thanks Bill, for correcting q2! It wasn’t nice in the neoliberal pit!

    15. Curt Kastens says:

      Dear Mark,
      Of course my example of 40 year ofd work is “contradictory”, that was exactly my point.
      Yes I am aware of your point number 2 what did I say that confused you about that?
      I brought up Milton to show that any idiot could figure that out.
      As to your points 4 and 5 what did I say that led you to believe that I do not already agree with those points?

    16. Mike Ellwood says:

      Tom says:
      Saturday, January 20, 2018 at 5:50

      Private sector spending can cause inflation too, and central bank most certainly doesn’t have a direct role in how much lending private sector does. Central bank doesn’t have any role to influence people bidding prices of something up either.

       
      Tom, I absolutely agree that private sector spending can, and does, cause inflation. However, as to central bank having a direct role in how much lending private sector does, I’d say “that depends”. Depends on which country, which CB, and in which historical period we are talking about.
       
      In Japan in the post-war period, the BOJ had a very direct role to play in how much private banks lent, and to which industrial sectors. This is documented very interestingly in Richard Werner’s “Princes of the Yen”, and he refers to this as “window guidance” (supposedly because the representatives of the private banks (who were the supplicants in this scenario) had to queue up at a window at the BOJ to await their lending instructions).
       
      It also happened, to some extent, in post-war Britain, with the nationalised Bank of England operating various forms of credit controls (with varying degrees of success) over the years. Even nowadays the BOE supposedly has an oversight role to play in UK bank lending, although I don’t suppose it even pretends to have much in the way of actual control over it. (There are those who say that the BoE was never really nationalised at all; I haven’t got around to looking into this conspiracy theory properly. I’ve long thought that in practice it was fighting in the commercial bank’s corner rather than the public’s).
       

      Billy blog has plenty of inflation blogs, I think we should look at them first before saying there is no answer. Its likely to have answers. It does take time to learn MMT, so you have to slow down and keep reading. =)

       
      True…the “trouble” is that if you slow down in your reading, Bill is likely to have produced another half a dozen or so more articles to read and you will be even more behind. :-)

    17. Mark Kinnear says:

      Curt

      Were you trying to make a point or just waffle ?

    18. Curt Kastens says:

      I supose if I would have covered it with Canadian Maple Syrup the waffel would have been clear.

    19. Tom says:

      Mike Ellwood,

      “Tom, I absolutely agree that private sector spending can, and does, cause inflation. However, as to central bank having a direct role in how much lending private sector does, I’d say “that depends”. Depends on which country, which CB, and in which historical period we are talking about.”

      Yes, I agree. What if the central bank doesn’t provide needed reserves.

      “True…the “trouble” is that if you slow down in your reading, Bill is likely to have produced another half a dozen or so more articles to read and you will be even more behind. :-)”

      Yep. =p

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