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Saturday Quiz – November 28, 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. The more reserves the commercial banking system has the more likely it is to lend.

2. The money multiplier concept is predicated on the notion that banks only lend when they have reserves and they get them by attracting deposits.

3. The saying "Investment brings forth its own saving" refers to the fact that the non-government sector is not sovereign in the currency and has to finance its spending.

4. The private domestic sector overall can never save if there is a current account deficit and the government continually balances its budget.

5. After a downturn where governments have run large budget deficits, the only way to reduce the stockpile of public debt is for the government to run surpluses in the future.

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    This Post Has 15 Comments
    1. Dear JKH

      That is probably giving them too much credit.

      I include the IS-LM and deficit-dove Keynesians in the group too by the way – that is, those who believe that the money multiplier concept is a fair depiction of the way the banking system operates.

      best wishes
      ps: Thanks for you lovely answer to Scepticus. I am having “shortage of time” troubles catching up on all the great comments.

    2. 4 out of 5! Not bad.
      Bill,I’ve only recently (within the last two years) begun learning about economics so in some ways I may be ahead of the game,less to unlearn. I’ve been reading Randy Wray and Marshall Auerbacks writings and linked to this blog two days ago and am wearing it out !

      Thank you VERY much.

      I’m trying to learn about how taxes fit in, I understand private accounts are debited then treasury is credited then the $ is gone.
      I’d read that the purpose of taxation is controlling inflation but I need to read more on it. If you or one of your readers could point me to a blog which would explain this I’d be very grateful.
      Thanks again

    3. OK, just found this blog, and thought I’d see how I’d score. Read the last week’s posts, and still failed miserably, 2 out of 5.

      Frankly, perhaps I’m just too dense to understand what you’re talking about here, but based on the notion that you do not really understand something unless you can explain it to your grandmother, I suspect a more succinct approach might be helpful to your readers.

      I’ll follow your blog for a bit as sometimes osmosis helps my understanding, but I’m still puzzled as to how the exponential nature of the astronomical debt that was created can possibly be serviced (without an appropriately astronomical response, the current response seems sub astronomical, and even if it approached the staggering levels appropriate to sustain 1.44 quadrillion dollars in derivatives, I suspect it would be too disruptive to manage by anyone but astrophysicists cum economists, and those are in short supply).

      Perhaps I’m naive in my expectations of a ‘grandmother friendly’ explanation, but I’m ultimately an optimist (although a bit pessimistic given your rather extreme political bent… I’ve found that those with extreme political leanings usually produce idealistic notions that eventually prove impractical… At best).



    4. Dear Dave

      Welcome to my blog and thanks for your comment.

      You have to separate a person’s political views from their understanding of the way the monetary system operates. Modern monetary theory is neither right, centre of left wing. What I would do with the understanding of how the monetary system operates reflects my ideology.

      best wishes

    5. Thanks Bill,

      If it’s indeed possible to separate extreme political views from monetary policy, I’ll be grateful, but it would certainly make you the exception to the rule..!

      However, I’m still at a loss as to how an explosion in debt-based money can be rectified without creating an (inherently unstable) larger explosion, IOW, how a bigger bubble can replace a burst one without creating a chaotic marketplace that eventually ceases to function. From where I sit, the central banks (in a puzzling attempt to indebt the world) simply created too much debt too quickly, rendering it unserviceable – And the current attempt to muddle through will prove impossible. I’m just sitting around waiting for this to play itself out.

      More on this concept can be found here

      AFA politics go, I think you’re perfectly entitled to enjoy the company of a majority of like minded individuals according to your community standards, as I like to enjoy the company of like minded individuals according to my community standards. As such, I’m big fan of everyone being forced to embrace diversity – Somewhere else. ; )



    6. Fascinating read. Thanks.
      Even Friedman endorsed the government money-creation powers in a fiat currency.
      He did so not only in supporting the full-reserve banking proposals of Fisher, but also in his own Monetary Framework for Economic Stability.
      Yours is a very essential contribution to understanding the inner natural workings of a monetary system, what Hemphill called the most important subject that intelligent people can consider.
      And, thanks again.

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