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Saturday Quiz – March 6, 2010

Welcome to the 50th Edition of 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. In the current macroeconomic debate, considerable attention is being focused on the public debt to GDP ratio with some mainstream economists claiming that a ratio of 80 per cent is a dangerous threshold that should not be passed. They therefore advocate that governments run primary surpluses (taxation revenue in excess of non-interest government spending) to start reducing the debt ratio. Modern monetary theory tells us that while a currency-issuing government running a deficit can never reduce the debt ratio it doesn't matter anyway because such a government faces no risk of insolvency.



2. Russia was forced to default on its outstanding public debt because it faced a major collapse of oil prices in world markets which meant it could no longer raise the foreign currency necessary to repay the loans via net exports. But the defaults were ultimately due to the currency peg against the US dollar that they voluntarily put in place.



3. Imagine that macroeconomic policy is geared towards keeping real GDP growth on trend. Assume this rate of growth is 3 per cent per annum. If labour productivity is growing at 2 per cent per annum and the labour force is growing at 1.5 per cent per annum and the average working week is constant in hours, then this policy regime will result in:




4. Students are taught that the macroeconomic income determination system can be thought of as a bath tub with the current GDP being the water level. The drain plug can be thought of as saving, imports and taxation payments (the so-called leakages from the expenditure system) while the taps can be thought of as investment, government spending and exports (the so-called exogenous injections into the spending system). This analogy is valid because GDP will be unchanged as long as the flows into the bath are equal to the flows out of it which is tantamount to saying the the spending gap left by the leakages is always filled by the injections.



5. Assume the current public debt to GDP ratio is 100 per cent and that the nominal interest rate and the inflation rate remain constant and zero. Under these circumstances it is impossible to reduce a public debt to GDP ratio, using an austerity package if the rise in the primary surplus to GDP ratio is always exactly offset by negative GDP growth rate of the same percentage value.





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