# Saturday Quiz – February 27, 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. Government spending which is accompanied by a bond sale to the private sector adds less to aggregate demand than would be the case if there was no bond sale.

2. If the external balance is always in surplus, then the government can safely run a surplus and not impede economic growth. However, this option is only available to a few nations because not all nations can run external surpluses.

3. In the same way the spending multiplier indicates the extent to which GDP rises when there is a given rise in government spending, the tax multiplier captures the impact of rising tax rates on GDP as people reduce their labour supply because of the disincentives associated with taxation.

4. Assume the government increases spending by \$100 billion in the each of the next three years from now. Economists estimate the spending multiplier to be 1.5 and the impact is immediate and exhausted in each year. They also estimate the tax multiplier to be equal to 1 and the current tax rate is equal to 30 per cent (30 cents in the \$). What is the cumulative impact of this fiscal expansion on GDP after three years?

5. In a stock-flow consistent macroeconomics, we have to always trace the impact of flows during a period on the relevant stocks at the end of the period. Accordingly, government and private investment spending are two examples of flows that adds to the stock of aggregate demand which in turn impacts on GDP.

1. Nathan Tankus says:

number 4 was very confusing and i don’t know whether you worded it badly or i didn’t really understand what you were saying/ how to figure it out

2. Nathan Tankus says:

“Assume the government increases spending by \$100 billion in the next three years from now”
does this mean that it spends 100 billion dollars 3 years from now or spends 100 billion dollars this year or it spends 100 billion more dollars each year?
i also don’t understand how the government could spend 100 billion dollars in year 1 of this mind game but the fiscal expansion only be in the millions of dollars.

3. Dear Nathan

Thanks for you input. I have slightly reworded to question to read:

Assume the government increases spending by \$100 billion in the each of the next three years from now.

That will make it clearer for you.

best wishes
bill

4. rvm says:

Dear Bill,

Why the answer of question #1 is “false”?
Isn’t it true that by buying government bonds the private sector will have less left to spend, hence reduced aggregate demand?

5. Nathan Tankus says:

i still don’t understand how the expansion is in the billions but the answers are in the millions. maybe i”m just not following the math correctly but the answer i got for the cumulative fiscal expansion was 360 billion dollars. please explain to me how you actually solved the problem and what you think may have led me astray.

6. NKlein1553 says:

Four out of five…so close! I don’t understand why number two is false. Doesn’t the situation in question two describe Norway’s economy? Strong external surplus enables the public sector to also run a surplus without any harm being done to the private sector? Maybe the reason number two is false is because of the phrase “not impede economic growth.” Even if it is safe for the public sector to run a surplus, that surplus is still destroying net financial assets so the economy isn’t growing as much as it could have. If that’s the case very tricky Professor Mitchell. If not what am I missing?

7. Nathan Tankus says:

nevermind i”m an idiot and absentmindedly taxed 30 billion off the fiscal expansion per year instead of 45 billion. i however think you meant billion and not millions in the answer choices.

8. Nathan Tankus says:

“NKlein1553 says:
Saturday, February 27, 2010 at 7:39
Four out of five…so close! I don’t understand why number two is false. Doesn’t the situation in question two describe Norway’s economy? Strong external surplus enables the public sector to also run a surplus without any harm being done to the private sector? Maybe the reason number two is false is because of the phrase “not impede economic growth.” Even if it is safe for the public sector to run a surplus, that surplus is still destroying net financial assets so the economy isn’t growing as much as it could have. If that’s the case very tricky Professor Mitchell. If not what am I missing?” i think the trick in number 2 is it depends on the situation. a country could have a continuous external surplus that is smaller then the budget surplus thus decreasing net financial assets and increasing leverage in the economy. i can also imagine a situation where a country that has huge external surpluses but deficient aggregate demand at home.

9. Ramanan says:

Nathan,

I too got tricked by 2! . . . The trick is in “safely” It is possible to have a budget surplus, but not “safely”.

10. Dear Nathan

Thanks for pointing out that I don’t know the difference between billions and millions. I was rushing last night and it was my error. I have fixed it now. Sorry for making you think about nothing although as you note you worked out that it was an error rather than being anything substantive.

best wishes
bill

11. Dear NKlein1553

4/5 is definitely getting close. I will explain the answer to Q2 later so as not to spoil it for others.

best wishes
bill

12. rvm says:

I am sorry for spoiling Q1, hopefully they won’t see my message.
Apologize.

13. Rationalist says:

“You scored 1 out of 5.”

I have more reading to do :).

14. Min says:

Gee, hope this doesn’t enter the loop of death! ;)

About Q. 2: Maybe the trick is in the quantification.

15. pebird says:

Good to see so many comments – I have been taking these quizzes consistently for about 4 months and am delighted when I get 4 of 5. I believe there are some tricks in a few of the questions at times, I wish there was a answer key (a few days later) so I could find out if I totally screwed up a concept or had missed some subtle point buried in the question.

I only got 2 of 5 in this quiz, and I got the billions/millions correct. I thought the external surplus question allowed a fiscal surplus in certain situations, so I don’t know why I got that wrong. I so wish to purge my neoliberal leanings, but I find it isn’t as easy as one would like.

16. /L says:

NKlein1553 says:
… don’t understand why number two is false. Doesn’t the situation in question two describe Norway’s economy? …

I believe there is a difference to run a external surplus by having huge amounts of attractive raw material, you don’t have to gear your economy to be competitive beyond what is needed to have a balanced trade, just extract the oil and put it on the global market. Norway have to act carefully so the big money flowing in don’t harm the internal economy by too much demand.

On the other hand Sweden have actively restrained it’s national economy to force a huge trade surplus over the one and half decade.

17. carping demon says:

Re #2…this may sound silly, but if there’s a trick it seems to me that it would be that not all countries can run external surpluses at the same time. A surplus needs a deficit somewhere.

18. /L says:

I don’t know how precise the statistics is today for trade balance but historical it didn’t use to add up, the world used to export more than it imported, I believe it was.

Usually it seems that politicians think trade surplus is very good and deficit bad, export surplus countries seems to praise them self as they have achieved something by necessity good but they don’t seems to realize cause and effect, by en large the cause for the worlds surplus export countries is USA trade deficit. As here in Sweden there is general consideration among politicians that consumerism is something negative but they all shine up and think it’s great when the trade surplus is mentioned, consumerism is great when foreigners do it but a dubious thing domestically. The very same politicians that think that our trade surplus is great can express distress about the American trade deficit and say something pompous that the Americans should do something about it, they doesn’t seems to realize that the American deficit is the mirror image of our surplus.

19. vimothy says:

“Accordingly, government and private investment spending are two examples of flows that adds to the stock of aggregate demand which in turn impacts on GDP.”

How can this be false? I’m a bit confused and have to admit that even after reading the suggested blog I don’t feel any wiser. Surely spending on real assets contributes to AD and GDP in any given period.

20. Dear Vimothy

Aggregate demand and GDP are not stocks – they are flows.

best wishes
bill

21. vimothy says:

Yes, just looked at the answers post. Thought your question was about AD rather than the difference between a stock and a flow. Thanks anyway.

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