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The Weekend Quiz – March 17-18, 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. Start from a situation where both the external surplus and the fiscal surplus are equal to 2 per cent of GDP. If the fiscal balance stays constant and the external surplus rises to be 4 per cent of GDP then national income has to rise and the private domestic balance moves from 0 to 2 per cent of GDP.

2. If all bank loans had to be backed by reserves held at the bank then this would act as a brake on the capacity of the banks to lend.

3. Assume a nation's central bank successfully maintains a zero interest rate policy and recession keeps the inflation rate at zero. Under these circumstances a program of fiscal austerity can reduce the public debt ratio even if the movements in the automatic stabilisers reduce the growth of tax revenue.

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    This Post Has 5 Comments
    1. Number 3 was confusingly phrased, imo.

      Using U.S. terminology, FFR*=0 and the inflation rate (measured how? GDP deflator?) is 0. What does a “program of fiscal austerity” actually entail? (G-T) decreases? Or (G-T)<0?

    2. Re: question 1. My mind wandered a bit, and I thought that in the current EU set up Germany is running large trade surpluses which means it can balance its federal budget and still satisfy the private sector’s propensity to save. On the other hand, other EU countries that are running trade deficits (funding Germany’s surpluses?) have to run government deficits in order to satisfy their private sector’s desire to save. If they are forced to run budget surpluses instead, disaster is beckoning, right? Why would any nation stay in the EU in order to support Germany’s trade surpluses. Additionally, does this mean the euro is overpriced for these deficit countries? Whereas it is underpriced for Germany? Anyway, I wonder.

    3. Question about sectoral balances.

      Could the distribution of the balances shift but GDP remain unchanged – i.e. national income not necessarily rise? So could the external surplus go from 2% to 4% of gdp (a proportion) but GDP still fall or stay the same overall?

      So period 1
      G-T = S-I – (X-M)
      -2 = 0 – 2 ( and GDP = $100 so both surpluses are $2)

      Period 2
      -2= 2-4 (and GDP is still $100 because internal consumption say dropped but that was offset by more exports)

      This confuses me when the balances are % of GDP rather than absolute figures…..

      Please help me someone!!! I am too old to worry about seeming dumb.

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