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Saturday Quiz – May 1, 2010

Welcome to the May Day edition of the billy blog Saturday quiz. So comrades – 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. The payment by the central bank of a positive interest rate on overnight reserves held by the commercial banks means that the former no longer has to conduct open market operations to ensure its policy rate is sustained (ignore any reserve requirements in place when answering).




2. The payment of a positive return on overnight reserves held by the commercial banks equal to the current policy rate will tend increase the overall level of reserves held by the latter (ignore any reserve requirements in place when answering).




3. The payment of a positive return on overnight reserves held by the commercial banks equal to the current policy rate will tend to increase the volume of broad money in the system (ignore any reserve requirements in place when answering).




4. A sovereign national government, that is, one that issues its own floating currency faces no solvency risk with respect to the debt it issues.



5. Taxation provides the necessary resources to a sovereign national government to allow it to maintain full employment






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    This Post Has 10 Comments
    1. So many trick questions on these Saturday quizzes! I don’t know if you teach undergraduates Professor Mitchell, but if you do they must hate you =)

    2. I read 5 times first three questions because I knew they were tricky and I got them

      But last two were easy and I missed them!
      aaaaaaaaaaaa (crying sound)

    3. May I please ask anyone if he/she has a double entry representation of what happens when say a treasury check of $1,000 is deposited at the bank, for each of Treasury, the CB and the bank. This would really be useful in spreading the word to non-initiated MMT folks. Thanks.

    4. BX12

      I assume you mean that the check is settled.

      For the CB
      Assets: No change
      Liabilities/Equity: Reduce Tsy’s account by 1k, raise RBs by 1k (the depositor’s bank’s account)

      For the bank
      Assets: Raise RB’s by 1k
      Liabilities/Equity: Raise deposits by 1k (the depositor’s account)

      For the spending recipient
      Assets: Raise deposits by 1k
      Liabilities/Equity: Net worth increased by 1k

      For the Treasury, if you are interested–we normally don’t do this, as we focus on the Tsy’s account at the CB, thus combining the CB and Treasury for sovereign currency issuers.
      Assets: Reduce account at the cb by 1k
      Liabilities/Equity: Net worth decreases by 1k

      Now, if this increase in RBs leaves undesired excess reserves circulating and the cb sets its target rate above the remuneration rate, then either the cb or the Tsy will have to offer an interest bearing alternative to the newly credited RBs in order to hit the cbs overnight rate target.

      Best,
      Scott

    5. Scott and NKlein1533,

      Thank you both very much.

      About:
      For the bank
      Assets: Raise RB’s by 1k
      Liabilities/Equity: Raise deposits by 1k (the depositor’s account)

      My (sparse) accounting education was a long time ago, but I remember the rule of thumb that Liability is the source of funds and Assets is a use of funds. I would have thought therefore, that the banks’ reserve would be a Liability and the client’s deposit an asset. Would someone care to dissipate my misundestanding?

    6. Hi Bx12

      Bank RBs are its own deposit with the CB, so that’s their asset. Customer deposits are essentially debt for the bank, so those are liabilities.

      Regarding sources and uses, the Tsy’s spending was the source, and it showed up on the bank’s balance sheet in the form of the customer’s deposit, so you’re right, it was on the liability side. The RB’s then are the use.

      Best,
      Scott

    7. I have a bone to pick with the wording of question 5 – probably because I was upset at not getting the Friend of the People Award :(

      It was my understanding that taxation does not ‘provide’ the government with anything. If Bill had said ‘taxation makes resources available so that the government can purchase them without generating inflation, so as to maintain full employment’ then I would have got his right answer. But this seems a long way from ‘provides’.

      Taxation doesn’t put the resources into the governments hands, and neither is it required for the government to be able to purchase them. All it does is make that purchasing non-inflationary.

      Any chance of getting sustained on appeal?

    8. Dear Begruntled

      As the ultimate arbiter of the Saturday Quiz I think you deserve the Award which I now bestow on you (-:

      Your reasoning is sound.

      congratulations.

      best wishes
      bill

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