Saturday Quiz – August 29, 2009
Welcome to the billy blog Saturday quiz. The quiz tests whether you have been paying attention over the last seven days.
See how you go with the following five questions. Your results are only known to you and no records are retained.
The private sector can determine the size of the budget deficit at any point in time.
Answer: 42
I have an elementary question regarding (2), which will probably see me sent to the back of the class, but here goes anyway..
I don’t believe that additional debt issuance would necessarily reduce demand for it, but I would have thought that, all else equal, an increasing supply of government debt would tend to lower the price of newly issued debt, causing yields to rise. Or is this a case where the extra supply generates extra demand, offsetting such a price effect?
I understand that the funds (and hence potential demand) to pay for the newly issued debt come from government spending in the first place, and that there is no crowding out effect, but I can’t seem to get my head around this seemingly fundamental issue.
Feeling pretty stupid, can anybody help?
Dear ParadigmShift
Whether the demand for public debt falls as more debt is issued is not the question. That may or may not occur depending on the circumstances. But if we take it as given that the private demand falls then under the auction systems in place yields rise to clear the tender. So that part is true (by definition). But the second part is clearly false but it is the inference that is usually made by those who claim that public borrowing forces up borrowing costs generally.
Don’t feel stupid.
best wishes
bill
Thanks Bill
That’s much clearer to me now.
Rgds
P.S