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The Weekend Quiz – May 18-19, 2019

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. Government spending which is accompanied by a bond sale to the private sector adds less to aggregate spending on day 1 than would be the case if there was no bond sale.

2. Assume the government increases spending by $100 billion in year 1, again in year 2 and again in year 3. Economists estimate the spending multiplier to be 1.5 and the impact is immediate and exhausted in each year. They also estimate the tax multiplier to be equal to 1 and the current tax rate is equal to 30 per cent (30 cents in the $). What is the cumulative impact of this fiscal expansion on GDP after three years?

3. In a stock-flow consistent macroeconomics, we have to always trace the impact of flows during a period on the relevant stocks at the end of the period. Accordingly, government and private investment spending are two examples of flows that adds to the stock of aggregate spending which in turn impacts on GDP.

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    This Post Has 3 Comments
    1. I understand the focus of question 1, but think it may gloss over important monetary dynamics. For what is the US Federal reserve doing with its open market operations, exchanging money for bonds on an ongoing basis, but affecting interest rates and investment / liquidity decisions, which eventually affect aggregate spending? There was a long series on the IS/LM framework in this blog, but it hewed to conventional presentations, after which there were critiques of its dynamics and application. Fine… but the question remains, what would MMT do about liquidity preference, and control of interest rates? If, say, the outstanding federal debt was exchanged immediately for dollars, would that have any effect on the economy? (Even though, per the background of this question, no net change in the financial position of anyone would happen, other than the loss of a future income stream.) I think it would, by driving rentiers to seek income from private investments, thus increasing aggregate demand.

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