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The Weekend Quiz – August 24-25, 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. A fiscal deficit equivalent to 3 per cent of GDP signals that the government is having a less expansionary impact than if the fiscal deficit outcome was equivalent to 5 per cent of GDP.




2. If the external balance remains in surplus and is adding to total spending, then the national government can run a fiscal surplus without preventing economic growth from occurring.



3. Consider the following table which describes four different economies in terms of the behavioural parameters relating to the leakages to aggregate demand. Assume that in all four economies, there is idle capacity, the central bank holds all interest rates constant, inflation is constant and there are no changes in international competitiveness.
Which economy would deliver the largest national income bonus for a given discretionary expansion in government spending.







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    This Post Has 8 Comments
    1. I strongly disagree with this one:

      “2. If the external balance remains in surplus and is adding to total spending, then the national government can run a fiscal surplus without impeding economic growth.”

      A government fiscal surplus *always* impedes economic growth. It removes money from the economy, which will slow the growth of the economy.

      If we have money coming in from the external sector, and the government is running a fiscal surplus, and there is still economic growth, then this growth will certainly be smaller (impeded if you like), than if the government was running a balanced budget.

      Maybe the wording is wrong. But from google thesaurus, impeed means : hinder, obstruct, hamper, handicap, hold back, hold up, delay, interfere with, disrupt, retard, slow, slow down, brake, put a brake on, restrain, And that is exactly what government surpluses do, regardless of non-government balances.

    2. Tony, Bill regularly states that neither a surplus nor a deficit matters in and of itself, it all depends.

      If private domestic spending is positive, and there is an external surplus, then running a surplus equal to or less than the external surplus will not impede the domestic spending.

    3. “surplus nor a deficit matters in and of itself, it all depends.”

      Thats true. BUT this does not stop a surplus putting breaks on the economy, and does not stop a deficit putting the accelerator on the economy.

      The ‘all depends’ is based on if the economy needs an accelerator, or break. If external money is flowing in, then a surplus may be needed to slow the economy, to slow growth. doesn’t mean that growth cant continue to grow, but it will grow at a slower rate.

    4. Tony Weston is right when he says “A government fiscal surplus *always* impedes economic growth. It removes money from the economy, which will slow the growth of the economy.”

      That is standard MMT thought and has been explained many multiple times by Bill Mitchell. The “deficit spending 101” blog posts explain this (and hopefully the link will ensure that this comment will not be able to influence anyone to cheat on the quiz.) http://bilbo.economicoutlook.net/blog/?p=332

      But I guess if an economy is already supposedly at ‘full productive capacity’ and can produce no more additional real goods and services, and the private and foreign sectors together continue to increase spending, then the economic growth that would occur would be purely ‘nominal’, as in prices increasing. An increasing government surplus in that (rare) circumstance might not slow production of real goods and services- just the nominal price increases.

      So unless we care more about nominal economic growth than the actual amount of goods and services produced then the damn quiz answer is correct (and yes I got it wrong again) because it is within the realm of possibility (which is what the word ‘can’ means where I come from).

      Thanks for the quiz. I learn a lot from it and really do appreciate it.

    5. Dear Tony Westen (at 2019/08/23 at 8:42 pm)

      Yes, I think I agree with you that the wording was slack. I meant the question to be that the fiscal surplus doesn’t prevent growth from occurring.

      Thanks for the scrutiny.

      best wishes
      bill

    6. Dear Bill,

      I thought elaboration about possible answers were not allowed before you post the Answers at day 2!!

      Best regards

    7. Tony Weston, you have achieved an extraordinarily rare accomplishment- you got Bill to admit you might be right and that maybe there was a problem with a quiz question. I salute you and congratulate you and am unbelievably envious at the same time. I can only hope that one day I will be right about something also :)

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