The Weekend Quiz – December 8-9, 2018

Welcome to The Weekend Quiz. The quiz tests whether you have been paying attention or not to the blog posts that I post. See how you go with the following questions. Your results are only known to you and no records are retained.

1. An application of Modern Monetary Theory (MMT) tells us that the current proposals for a Green New Deal in the US and elsewhere will lead to crowding out of other investment.

2. A rising government deficit will always allow the private domestic sector to increase its saving in nominal terms.

3. A lack of a close correspondence between the growth of bank reserves and the growth in the stock of money is evidence that credit creation is being tightly constrained.

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    8 Responses to The Weekend Quiz – December 8-9, 2018

    1. gusphase says:

      Hey man,

      Sorry to hijack the comments section of something unrelated to this, but I’ve been kicking an idea around in my head for a while.

      It seems to me that the money supply should be tied to the resource base. When commodities are cheap, there is no reason not to expand the money supply, as far as I understand it. A massive increase in the supply of oil, copper, iron, etc means that there are resources available to be consumed or refined into products. When commodities are in bubble territory, and supplies are low, expansion of the money supply seems to cause the economy to spin its wheels.

      So here is something I was thinking of:

      What if the federal reserve bought a certain supply of a basket of commodities all targeted to a specific price, using new money, and then sold those supplies off when prices of commodities rise too high? This could be done with a soft price target. For example, the soft target for oil could be $80 a barrel. When the price of oil falls below that level, the central bank could print new dollars to buy up those barrels of oil as the price sinks, accelerating buying the lower the price falls, with a hard floor of, let’s just say, $50 a barrel. If the price rises above $80 a barrel, the central bank could start selling this oil, with a hard price ceiling target of $110 a barrel. When the central bank buys barrels of oil using newly printed money, they would be adding dollars to circulation, and when they sold oil, they’d be taking money out of circulation while also offsetting the low supply of oil.


    2. cs says:

      1/3….oh dear. Clearly I need more nuanced understanding still…..

    3. Bill W says:

      I obviously do not know what the proposals to the new green deal are.

      Of course it is meant to crowd out pollution causing investment.

    4. Lance says:

      2 out of 3! No3 wrong. Better than last week’s attack of neoliberalism!

    5. Larry Kazdan says:

      Re: Question 3:

      A lack of a close correspondence between the growth of bank reserves and the growth in the stock of money is evidence that credit creation is being tightly constrained.

      The answer is True.


      Assume that all private banks are expanding their loan portfolios such that there is little net transfer of reserves among them, and there is no increase in reserves from gov’t spending. In this circumstance, wouldn’t there be “A lack of a close correspondence between the growth of bank reserves and the growth in the stock of money” but no “evidence that credit creation is being tightly constrained” which would make the answer false?

    6. N says:


      Your proposal has been tried, at least to some extent: Bill Mitchell refers in a few of his blog posts to the example of the “Wool Floor Price Scheme” which the Australian government used to stabilise the price of wool:

      I am not sure that the conceptual link to the overall money “supply” (really a stock) is helpful though, or trying to vary the stock of money to match the overall stock of copper+oil+wool+houses etc.

      Rather, my understanding is that MMT concentrates mostly on the _flow_ (not stock) of money and the _flow_ of commodities, and of manufactured goods, and of work/labour. (Work is by its inherent nature a flow not a stock, though in some cases it produces a stock of goods.)

    7. Mel says:

      Larry Kadzan,
      Seems very plausible to me.

    8. Steve_American says:

      @ Bill W.,
      Progressive Dems, like AOC, all or almost all know about MMT.
      MMT says that deficit spending can’t possibly crowd out private investment because it adds money to the economy, which is the opposite of what mainstream economists say it does.
      So, no, AOC doesn’t intend to crowd out any private investment.

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