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Saturday Quiz – March 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. While the US government is sovereign in its own currency, increased nominal expenditure on health care will still reduce the real resources available for other uses and so political choices have to be made.



2. In 2001, Japan defied the ratings agencies who had downgraded their sovereign debt. They refused to alter their fiscal commitments despite constant pressure to cut the deficit. Given that countries such as Greece and Portugal are unlikely to be expelled from the EMU if they continue to exceed the Stability and Growth Pact conditions, they should similarly resist the demands of the ratings agencies for increased fiscal austerity and thus spread their fiscal adjustment over a longer period which would inflict less damage on their nations.



3. Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.



4. It is clear that EMU nations cannot use the exchange rate mechanism to adjust for trading imbalances arising from a lack of competitiveness within the Eurozone. With fiscal and monetary policy tied by the EMU arrangements, the only adjustment mechanism left is to reduce wages and prices to restore competitiveness. While harsh this will ultimately improve the competitive position of Greece, Portugal, Ireland and other nations currently in external deficit.



5. If the US budget deficit keeps rising to meet the need for more fiscal stimulus, it would have to bear the political costs of a rising public debt ratio. This is one of the reasons the US government is talking about reducing net spending.





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    This Post Has 8 Comments
    1. About #5.

      I’m not sure how the answer can be false. There are no real costs of a rising public debt ratio (in and of itself) so the costs could only be political.

      It is only political pressure(and a misunderstanding of economics) which has the US government talking about reducing net spending.

      What am I missing?

    2. I almost pressed False for #5 until I realized that the increased employment benefits of stimulus would be a political benefit (to most of the population) and hence no cost. Unless you are a banker – who would probably have higher political costs in terms of payoffs, campaign contributions, advertisements, etc.

      This was a devious test – ha ha I got 80% – my highest score in 3 months.

    3. “Fiscal rules such as are embodied in the Stability and Growth Pact of the EMU will continually create conditions of slower growth because they deprive the government of fiscal flexibility to support aggregate demand when necessary.”

      I don’t see how this is false. If the Eurozone as a whole was to adopt this kind of fiscal rule, I do not see how it could fail to deprive the Eurozone of fiscal flexibility. Obviously the fiscal rules in the Stability and Growth Pact themselves can be sidestepped at the Eurozone level, but only if the Eurozone avoids imposing these kinds of fiscal rules at that level.

      What did I miss when I read “clowns to the right of me, jokers to the left”?

      BTW, billyblog has been linked to at the European Tribune:

      http://www.eurotrib.com/story/2010/3/26/172122/142

    4. Dear Bruce

      The question wasn’t whether the rules reduce fiscal flexibility. By definition that is given and the aim.

      So the point is whether there are other factors that render the rules non-binding. See the answers and discussion for further analysis.

      best wishes
      bill

    5. Dear Greg

      The question wasn’t about whether there are or are not real costs of a rising public debt ratio.

      It was whether a rising budget deficit leads to a rising public debt ratio. The answer is clearly false. Please see the answers and discussion for further explanation.

      best wishes
      bill

    6. But Bill, even if the constraints are at times non-binding, the economy still has the legacy of the lower-than-otherwise productive capacity due to the fact that the constraints will certainly be binding at times.

      Whether or not it binds percentage growth rates is an open question, but real growth will be continually constrained by periodic policy-imposed instability in demand.

    7. “BruceMcF says:
      Monday, March 29, 2010 at 8:11
      But Bill, even if the constraints are at times non-binding, the economy still has the legacy of the lower-than-otherwise productive capacity due to the fact that the constraints will certainly be binding at times.

      Whether or not it binds percentage growth rates is an open question, but real growth will be continually constrained by periodic policy-imposed instability in demand.”
      you missed bill’s point. the ratio would never rise because gdp would rise along with public debt.

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