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Saturday Quiz – March 21, 2009

This is a new feature of billy blog – the Saturday quiz. It tests whether you have been paying attention over the last seven days.

See how you go with the following questions. Your results are only known to you and no records are retained.

Quantitative easing




Bonds have to be issued by the national governments




Budget deficits




Budget surpluses




Federal government budget deficits







Spread the word ...
    This Post Has 17 Comments
    1. Dear David

      I know it is easier to get a degree these days but the billy blog Saturday Quiz is all about glory. That being said, maybe I could take advantage of the nonsensical neo-liberal scheme where public institutions like TAFE etc have to compete against shop front private training companies. This is the scheme our current government inherited from the previous regime and are, seemingly, intent on not only retaining it but also extending it to further undermine the viability of our public institutions. I could apply for status as a private training provider. It is starting to sound ok: the billy blog academy.

      best wishes
      bill

    2. Hah, 5 out of 5.

      Not bad for a school janitor with no economic training, if I do say so myself. Of course, one or two of them might have been luck. Hmm, I can’t really see why this is often referred to as “the dismal science”, it’s all quite fascinating really.

    3. Don’t get too complacent Lefty, I plan to make the next quiz devilishly difficult so that you will have trouble telling the neo-liberals from the annointed. Only the best will survive!!

      best wishes
      bill

    4. Hey Bill

      Great blog!!

      5 out of 5

      One caveat . . . if the central bank’s target rate is set equal to its remuneration rate (as previously in Japan and since last fall in the US) then deficits don’t require bond sales even if the target rate is positive (in other words, reserves need not be endogenous . . . it depends on the method of interest rate targeting in place). You obviously know this already, but I’ve been emphasizing it more and more since it further demonstrates the importance of the horizontal AND vertical components of money, rather than just the horizontal that some of our PK friends almost exclusively emphasize.

    5. Dear Scott

      10 out of 5 is expected from you. Yes, the caveat is true. I couldn’t really articulate that in a short question though. The general point remains. But I am glad you have offered this to the readers of this blog.

      best wishes
      bill

    6. There will be more quizzes each Saturday. If you have any nice questions to offer please send them. Any help I get will be appreciated. Multiple choice, True/False are all okay.

      best wishes
      bill

    7. Hi Bill

      Great Blog.

      2 queries..

      Would you or Scott be able to expand on his comments at some stage? I’m not quite getting it:
      “One caveat . . . if the central bank’s target rate is set equal to its remuneration rate (as previously in Japan and since last fall in the US) then deficits don’t require bond sales even if the target rate is positive (in other words, reserves need not be endogenous . . . it depends on the method of interest rate targeting in place). ”

      also.. Once I started to grasp the correct economic “paradigm” that you are outlining here, it all starts to make perfect sense at the macro level. I would consider myself a conservative and love the idea of a job guarantee, it just makes perfect sense. However, at the micro level do you not still need firms competing in the way neo liberalism states? I’m refering to your comments about TAFE, however, I agree with the point that you were making. I’m no economist so easy on the jargon please..

      Respectfully
      Paul

    8. I will rise to the challenge Bill.

      Heh – maybe I could get a golf-type handicap, seeing that it is likely that I will be the only janitor among a field of academics.

    9. Dear Paul

      Thanks for your nice comments.

      In relation to the first point – raised by Scott. Monetary policy is usually defined in terms of: (a) a lending or discount rate which the rate charged by the central bank for loans they make to commercial bank in return for collateral (bank assets) which enables the latter to meet their reserve requirements (positive balance); (b) a remuneration or support rate, which is the rate of interest that the central bank pays commercial banks for certain reserves held by the latter at the central bank; and (c) the policy target or cash rate which is the rate the central bank wants to maintain through its market operations. In Australia, this is the rate that Reserve Bank sets each month and which gets so much attention.

      In many countries the remuneration or support rate is set to zero, meaning that excess bank reserves earn nothing. In Australia, this rate has typically been 25 basis points below the policy or target rate. Further the discount rate is typically set above the policy or target rate as a penalty for banks coming to the “discount window” as a last ditch attempt to borrow reserves. Banks prefer to use the Interbank market to get any shortfalls of reserves on any particular day.

      Note that banks lend and then work out their reserve positions. They know that whatever happens the central bank will always loan them any missing reserves. This actual practice makes a mockery of orthodox economics which claims banks have to have reserves before they will lend. Not true at all.

      So Question 2 (option 2) in the quiz – “Bonds have to be issued by the national governments if the central bank desires to maintain a constant short-term target interest rate and net government spending is rising” has to be qualified where the central bank pays a non-zero remuneration or support rate as in the case of Australia. Under these circumstances, when there is a budget deficit and excess reserves, competition in the interbank market would drive the overnight interest rate down to whatever support rate was being used by the central bank at that time. So the point remains that the central bank would lose control of its policy rate unless it issued government debt which gives the bank a market return on the excess reserves.

      What Scott was referring to is that before October 2008, the remuneration or support rate was set at zero in the US. So no interest was paid on commercial bank reserves held at the central bank (Federal Reserve banks). On October 6 the Federal Reserve announced that it would start paying interest on overnight reserves according to a special formula that computes (sort of) average balances. It is argued that paying a support rate allows the central bank to more easily conduct its open market operations and maintain its target rate of interest (this requires daily management of the cash system). The reason it is easier is because there is less variation in commercial banks’ balances held at the central bank.

      At this present time, for all intents and purposes the three rates outlined above are converging in the US which means that the central bank does not need to issue any debt to maintain control of its target rate. Interbank competition will not at this point in time drive the overnight rate below the policy rate (which is just about zero anyway – so the issue is somewhat moot).

      But these are special circumstances and not at all typical.

      Hope that helps. Maybe Scott will chime in with his perspective next.

      On the need for competition at the micro level … well is it really competition when a small firm which offers only one narrowly targetted course (like some business course) can set up a shop front; have one book case in a corner and call it a library; avoid any social obligations to enhance community education; pay only casual rates; is allowed to compete against the public institution which has to offer a wide-array of courses including many that do not deliver “market returns” but, instead “enhance social returns”; have a full range of IT and library facilities; maintain full-time teaching staff etc etc. That is not competition, it is slaughter. Not much jargon there.

      best wishes
      bill

    10. Heh – not TOO tough I hope. If the quiz were too tough it would only serve to provide brain-teasers and debating points for academics and professionals already deeply acquainted with the subject of economics, rather than broadening awareness and understanding by Joe Average and interested laypersons.

      I am currently enjoying explaining to worried people exactly why the defecit is nothing to lose sleep over and that our children and grandchildren need not be saddled with intergenerational debt as a result. There is NO general public awareness of this or of how federal government budgets function vs household/business budgets. As a result, the neo-liberal fallacy is very easily perpetuated – because unless Joe Average has been shown otherwise, it just makes logical sense.

      Respectfully
      Lefty

    11. It was a joke Lefty. And not too many professional economists even are actually acquainted with the way the system actually works. If you saw the textbooks they were taught from you would soon see why this is the case.
      I hope you are spreading the word out there and get people talking and thinking. My aim is to provide some basic understandings of how it works and hope that it spreads out.

      best wishes
      bill

    12. Cheers Bill

      Yes, I thought it might have been but when reading pure text it’s sometimes impossible to be 100% certain. Have you ever considered allowing a handfull of basic emoticons?

      Anyhow, yes I am spreading the word at every opportunity, including to a relative this afternoon who mentioned the Obama administration “printing money” and had heard people voice concerns about this being inflationary.

      Cheers again

    13. Hi Bill

      Thanks for your detailed reply. It will take a little time to digest. I’ll be back with more questions I’m sure.

      Regards
      Paul

    14. I think that if you put down the answer that makes what the government is doing at the moment look bad you should get the right answer. Not that I am saying that is always a bad thing, it just appears to be a trend when I do these quizzes. Although I find understanding some of the definitions very difficult. It’s like Economics should have it’s own Dictionary. Oh well, I am still young. Plenty of time to learn.

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