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Saturday Quiz – January 2, 2010

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. Assume inflation is stable, there is excess productive capacity, and the central bank maintains its current monetary policy setting. It is then true that if government spending increases by $X dollars and private investment and exports are unchanged then nominal income will continue growing until the sum of taxation revenue, import spending and household saving rises by $X dollars.

2. The principle of opportunity cost at a macroeconomic level is violated by the existence of mass unemployment.

3. The Taylor rule sets interest rates according to the notion that the short-term real interest rate should reflect a mark-up or mark-down on the real natural interest rate. The add or subtract factors are determined by weights on the inflation and output gaps, respectively. Typically the output gap is calculated based on estimates of a natural rate of unemployment with determines the potential output level. If the natural rate of unemployment is above the true full employment level of unemployment, then the Taylor rule will always lead to deflationary monetary policy settings even when the central bank considers it is conducting a neutral policy stance.

4. The IMF frequently publishes GDP per capita figures for nations and for comparative purposes it converts the local currencies into US dollar equivalents. The measures however are misleading because they will show a nation is suffering a decline in living standards relative to other countries on this ranking if the local currency appreciates against the US dollar even if there is no change in domestic command over resources in the local currency.

5. As soon as adult individuals adopt social norms and start making decisions together which impact on each person in the group, mainstream economic theory becomes irrelevant and the competitive model of decision making and optimisation loses authority. It is only when individuals behave as psychopaths (according to the clinical diagnosis of psychologists) that the mainstream economic theory of choice has any traction at all.

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    This Post Has 5 Comments
    1. At a time when many regional areas such as EU, Middle-east, Latin-America(Mercasur) are forming(or the process is being initiated for such an union) monetary unions, why is New Zealand not forming a monetary union with Australia?

      I fail to understand, inspite of huge commonality between Oz and NZ, they are not coming together to form a union(Historically there was a possibility that NZ may decide to become part of Australia, whereas Western Australia had an option to become a separate country, but the opposite happened). NZ like OZ is predominantly European in its demography, both have pretty good standard of living, both have common language(unlike EU), both worship the Queen as their head of state etc.., but still they are two different countries with different currencies.

      Is it possible in the near future that Australia and New Zealand may merge as a nation or they may atleast have a common currency ?


    2. Dear Sriram

      Interesting question and it has been debated in the past. But unless we are to become one nation a currency union would reduce the fiscal capacity of each national government in the same way that the EMU nations have lost their capacity to manage their own economies.

      I see no movement to become one nation and so I would oppose the formation of a currency union between the two separate and currently sovereign (in their currency) nations.

      Besides it would be one less nation to play cricket if we merged!

      best wishes
      ps. I would question the terminology “worship the Queen”. The majority of Australians want to become a republic we just cannot yet agree on the shape of that new order.

    3. Bill, hope you don’t mind me posting a somewhat off-topic question here.

      As you’ve pointed out previously, countries that incur debts denominated in a foreign currency are at a disadvantage because they have to acquire that currency, rather than using their sovereign power of currency creation to repay debt. My question is, does this also apply to other, more discretionary liabilities that are denominated in another currency? What I am thinking of is the USD reserve currency status and the pricing of valuable commodities such as oil in USD. Although countries can convert their own currency to USD in order to purchase oil, aren’t they in a somewhat similar position to that of a debtor country who owes USD? Apart from the obvious functional difference between repayment of a loan in USD, and purchase of a commodity in USD, are the MMT implications equivalent, or are there other factors at play which render my analogy facile and meaningless? :)

      By pricing strategic commodities in USD, is the US getting an easier ride than other countries? I gather this is a controversial issue and opinions seem to vary considerably. I’d appreciate any light you can shed on this, thanks.

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