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The Weekend Quiz – April 14-15, 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. Assume that the external deficit of a nation is on average over the economic cycle equal to 2 per cent of GDP and that the government balances its fiscal position when averaged over the same cycle. We can conclude that on average the private domestic sector overall:

2. Trade unions that manage to push aggregate wages growth ahead of the inflation rate will ensure that workers gain a greater share of national income.

3. Sovereign government spending becomes more expensive when government bond yields for new issues rise.

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    This Post Has 10 Comments
    1. Lance says:
      Friday, April 13, 2018 at 16:55
      Three out of three! I have to confess the odd guess……

      Same here. :-) (not guesses, exactly, but I wasn’t 100% sure).

    2. Hello Prof. Mitchell!

      I have been doing these quizzes for a decade now, and I mostly get them right now. I love the explanations — I generally skip to the short answer and then think about the longer explanation later. The only explanations I sometimes have to work at now are those when one has to consider the evolution of the sectoral balances over a period of years (I love those little blue bar charts).

      I have also to say that your blog has been immensely helpful in my work for a certain government — I have tried not to plagiarize your work, but the ideas just seep in with repetition and I occasionally find myself repeating word for word what you have written.

      But it just struck me that it might be helpful to some of your followers if you could discuss how your thinking may have evolved over the last decade. I am aware of how you have added questions of framing and language (and group-think) to your work, but maybe one post, when you have a moment, on the evolution of your thought would be helpful.

    3. If unions succeed in doubling wages while inflation is 0.01%, workers will get a lower?? share of national income????

      What am I missing?

    4. Marvin depends on productivity changes also surely – if they get double the wages but now produce triple the amount they won’t be better off. Growth might exceed inflation, so even if wages go higher than inflation, still more of the growth might go to profits.

      Not sure about number three – does it depend on which realm of the possible you are in – the one where governments can always pay interest costs or the one where they think they can’t?

    5. Marvin,

      It could be that even earning more than the inflation rate still does not get them more of the national income. It could be that even more is required. Depends how much of the national income is already going to business owners profits and earnings. The key is the balance between the two. Capital and labour. Yes, the workers got more but the business owner got even more.

      CS, the sovereign govt can always pay interest and any default would be voluntary in its own currency with a freely floating exchange rate. It just creates the money ad hoc on its computer. The debt is not a debt in the sense of the household analogy which does not apply to a sovereign govt. The debt is only an unnecessary MATCHING of the deficit spending with a bond issue of money that already existed in the private sector and so is a portfolio swap, but for this law requiring deficit spending be matched with a bond issue, there would be no national debt and no excuse not to spend more on the public purpose.

      The national debt is like an old-time religion designed to scare people into not asking for much. Designed to widen the gap between the rich and the poor. Do not fall for it seductively logical as it may sound.

    6. I forgot that national income is tied to productivity. Higher productivity tamps down inflation, driving the profit aggregate higher while holding down wages tethered to inflation. Unless workers can be assured of their share of productivity they will lose ground in the percentage of total income.

    7. Alan Longbon,

      I did put the inflation-question to Bill the other week bug I did not get a reply. Maybe you(or someone else for that matter) could help me understand how MMT tackles the problems when government budgets are stretched with high inflation/interest-rates meaning that netinterest more or less “crowds-out” other spending. When more borrowing(debt with high interest just to pay interest on debt) is needed in a bad feed-back cycle!

      From a week ago;

      “As a MMT-soldier I think the weakest argument lies within the problems related to inflation. As far as I read so far MMT sees inflation-risk more as an endogen variable, i.e government buying up more resources than there are available. Looking back at the inflation-years in 60 and 70´s I think Europe imported it´s inflation from the US mainly. Even if that´s not completely the whole truth I think the trigger of inflation impulses came through the external sector. Then local internal system-infrastructures continued to manifest inflation until the ending of the dollar-gold peg(Bretton Wood) and the end of the oil-embargo(against the US) period had it´s final impacts(incl US FED raising it´s fundrate to 20%(1980) and later the Plaza agreements(1985).

      (todays disinflation is also more of a external sector-factor due to globalisation and outsourcing)

      So coming back to the question about inflation related to MMT I could see problems if nominal rates of a growing government debt(net financial assets)climbs high enough(say 10% instead of todays 2,8% on a UST 10ybond) to represent a too big piece of the government budget and thereby cause the government to fund it´s netinterest money with new debts(net financial assets) just to avoid austarity! You could maybe say that if inflation picks up slowly and real GDP-growth tags along there would not be any big problems. But the real problem with high cost-inflation is the multiplicator effects. It will finally show up as very negative for aggregate demand and therefore a stagnating real GDP-growth(stagflation).

      Maybe I missed something here but how would MMT respond to a scenario when the external sector is producing high inflation? Today there is already an environment with currency-competition.”

      “Maybe I should notice upon the question above that permanent centralbank buying of high-yielded GB´s to fund the payment of netinterest-expenditures by the Treasury is not the expected answer! Or is it? Monetizing budget netinterest on government debts?”

      //best wishes

    8. Thorleif, MMT shows that a currency issuing government does not have to issue debt at all if it doesn’t desire to. So borrowing is not needed in the first place and therefore logically ‘more borrowing’ is never needed. But if the government does decide to issue debt denominated in the currency it issues, it can, with the central bank, completely control the interest paid on that debt. So the interest rate on that debt is always a policy choice- not something imposed by ‘the market’.

      “How would MMT respond to a scenario when the external sector is producing high inflation?” What is your scenario where the external sector causes inflation somehow? I suppose MMT answer would depend on the scenario. Bill Mitchell discusses some of this here and in the posts before and after that one.

    9. Thanks for your answer Jerry,

      You said: “government does not have to issue debt at all if it doesn’t desire to”

      I think “desire” has to be suststituted with monetary policy involving the need to have; a) a positive real rate of interest in the long run, b) and that management of the cb´s funds rate have as we know a need for the transfer of cb-reserves to government bonds(reserve-shifting). In a high(or low) inflation environment the market for bills/bonds needs risk free investment-papers with different maturities. That means the government can not only issue short term bills because it is easy to control the short term rates. There is a desire to save by the private sector(incl pensions) and that includes longer maturities. So if I am right here a situation with high inflation could also mean high government expenditures(US i.e)! So what to do when netinterest-expenditures grows too large relative to taxes? Monetizing these expenditures?

      I think inflation is mainly about supply-issues. Domestically government can control demand but if inflation is channeled from the external sector through i.e supply-shocks; i.e crop-failure due to i.e global cooling(sun-cycle, volcanos etc), wars, tariffs and trade wars there is less independence. Floating exchange-rates is not a guarantee for fast adjustments and short lived effects. Whenever inflation really digs in there will probably be a longer period of contagious system-effects all over the world.

      What do we really mean by “desire” here? Optimal choices or total monetization?

      //Best wishes

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