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Saturday Quiz – February 13, 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. Aggregate demand is a crucial determinant of employment and output at each point in time, but the output that has to be purchased is the outcome of long-run trend factors such as technological change and population growth.

2. It is true that all official interest rates (which include the short-term policy target rate and all longer-maturity rates on government bonds) can be controlled by the central bank within the operational structure and tools at their disposable. However, the government doesn't pursue this option because they want higher interest rates to be set by the private capital markets so that they can dampen aggregate demand and avoid inflation.

3. One of the problems facing the Eurozone is that Greece, Ireland and Spain enjoyed rapid growth and allowed their real wage levels to rise faster than labour productivity. They thus lost competitiveness to Germany which contained real wages growth by a program of deregulation. Given that the member countries could not rely on depreciation of their exchange rate to offset this competitive loss their domestic wage adjustment now has to be more painful.

4. The change in the net worth of the non-government sector when the government increases its net spending is invariant to government issuing debt $-for-$ to match the net spending rise.

5. The expansionary impact of deficit spending on aggregate demand is lower when the government matches the deficit with debt-issuance because then excess reserves are drained and the purchasing power is taken out of the monetary system.

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    This Post Has 8 Comments
    1. I am not a neo-liberal, but I only got two ansewrs correct. Your choice of verbs is confusing to me. Perhaps we are divided by a commman language?

      I am from New England and we Yankees seem to have a hard time with our comman languarge.

      Thank you for your blog.


    2. Let me think aloud to see if I get some things right.

      Warren Mosler came out with a handy layman analogy in a recent CNBC appearance for issuing debt $-4-$ to match net spending : it’s like transferring funds from a checking account (the bank reserves received from net spending) to a saving accounts (bonds). The total financial assets are unchanged by this operation as they are determined by net spending in the first place.

      Wait! Would one not be richer by putting money with a savings account than a checking account? The above is a consequence of funds-flow analysis it actually says little about what the intrinsic worth of financial assets. My take on this, as a rough approximation, is that
      1/ The financial assets are worth in purchasing power terms in proportion to the size of the real economy
      2/ The proportion of bonds relative to reserves reflects some sort of wealth transfers between some group of agents, but I’m not sure which. Anyone wants to elaborate?

    3. One Sal… (OSO)
      Are you the same OSO that post at Angry Bear? Are you starting to buy into MMT? I would occasionally post at Angry Bear hoping to open their eyes to MMT. I gave up around 2007, but did go back one time to say “told ya!”.
      I suggested once before on this blog to mount an “attack” targeting popular blogs challenging mainstream economics. If anyone is interested, let me know.

    4. I scored 1/5 correct and then proceeded to cut my own wages and lower my working conditions as I simultaneously worried about the tax burden on future generations if we don’t return the budget back to surplus.

      It’s not easy.

    5. Why don’t you have an unofficial competition for the year whereby you record the success, or otherwise, of our weekly efforts? Or do I underestimate the work involved in capturing all that stuff?

    6. Dear apj

      I actually don’t see any of the attempts on the server side. All the processing is done on the client side so only you know how you are going. I think that increases the incentives to try. It would also be a bit of coding to script a records system – I would have to re-write the entire system in fact.

      best wishes

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