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Saturday Quiz – October 3, 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.

1. When a person repays a bank loan using actual cash the bank extinguishes the loan (reduces asset) but there is no liability adjustment because the payment did not come from the person running down a deposit account (a liability to the bank). So given the cash doesn't get destroyed by the bank this transaction creates a change in the net financial asset position within the non-government sector.



2. In a situation where the private domestic sector decides to lift its saving ratio we cannot conclude that the national government has to increase its net spending (deficit) to avoid employment losses.



3. Mainstream economic theory adopts a government budget constraint framework to analyse the consequences of fiscal policy and predicts that budget deficits now result in higher taxes and interest rates in the future. Assume that framework was an accurate depiction of the monetary system. We would then also conclude that if you want low interest rates then surpluses are better and the relative size of government in the economy has to be smaller.



4. An employment guarantee system administered by a national currency-issuing government is not financially sustainable if the entire labour force was working in it because then there would be no-one left to pay taxes.



5. In a fiat monetary system (for example, US or Australia) with an on-going external deficit, if you desire the domestic private sector to reduce its overall debt levels without employment losses, then you have to support the national government continually increasing the budget deficit in line with the private de-leveraging process.





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    This Post Has 2 Comments
    1. “Mainstream economic theory adopts a government budget constraint framework to analyse the consequences of fiscal policy and predicts that budget deficits now result in higher taxes and interest rates in the future.” It doesn’t matter – except to academic theoreticians – whether these guys are right or wrong. Read my lips: for socio-political reasons, during the lifetime of anyone reading this, there will NEVER be a democratically elected government ANYWHERE that does not use income (taxes and borrowing)and expenditure describing budgets which create a constraint framework that characterizes deficits as a liability and a formally-stated problem which requires an official position that they must be reduced at some future point.

    2. A pessimistic outlook Michael, though understandable.

      Don’t forget that for all of human history up until a couple of hundred years ago, slavery was broadly considered to be perfectly natural and hence, inevitable – a world without forced labour and ownership of human beings as no different to any other piece of property would probably have seemed inconcievable to most.

      Do we think that way today?

      Further, the fallout effects from the GFC may ultimately alter the public perception of budget surpluses if their misguided application causes economies to flounder and entrenches high unemployment. Remembering that this period just gone has been atypical in history, the manic desire to run surpluses may collide head on with a newly returned private sector desire to net save (historically the normal situation) resulting in unpleasant consequences.

      For a long time, deficits were not seen as some economy wrecker to be loathed – they were the norm. I see no reason why it is impossible for public attitude to shift back in this direction in our lifetimes.

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