Daily Archives: March 11, 2014

An economic quiz!

Let’s see if you have taken on board some of the things I’ve been writing about recently.

In a way,  life is simple for us currency users. We have to spend less than our income or we’ll end up in trouble eventually. We’ve all had experience of being a user but we can only imagine what it is like to be an issuer.

Let’s try to do just that. We’re the government and we have to issue currency by spending  and tax to get some of that currency back

1) Lets start off with an economy with little unemployment and low inflation. Its working as close to full capacity as is possible. The economy exports and imports in exactly equal amounts. The companies and individuals in the economy save and de-save (withdraw their savings) in exactly equal amounts too.
What is the correct course of action for government? Is it to aim to run:
A= A Balanced Budget    B= A  substiancial deficit    C= A substantial Surplus

2) Suppose a healthy industry grows up and the country starts exporting more than it imports. Say its 7% of GDP more. Money flows in as exports are paid for from overseas. The private sector still save and de-save in equal amounts. The industry owners successfully lobby the government to not let the currency rise. They don’t want their export prices to rise.
Now what is the correct course of action for government?

A, B, or C ?
Do we need to do anything else?

3) Industry owners and individuals in the economy decide , for whatever reason, that they would like to save more. Maybe individuals are getting older and need to put money aside for their retirement. They start to net save at the rate of 7% of GDP. The external surplus is still 7%

Now what is the correct course of action for government?
A, B, or C ?
Do we need to do anything else?

4) The country’s industry is overtaken by foreign competition. The external surplus disappears. It is back to an exactly even situation. Imports = Exports. Companies and individuals continue to net save at the rate of 7%. The government resolve to keep the currency stable.
What is our correct course of action?
A, B, or C ?
Do we need to do anything else?

5) Things get worse! (From a neoliberal perspective). The external situation turns into a 3% deficit. Individual and companies now net save less. Down to 4%
The government, ( that’s us!) still resolve to keep the currency stable.
What is our correct course of action?
A, B, or C ?
Do we need to do anything else?

A supplementary question.

6) What happens when governments, as they do,  choose the wrong answer?

The answers are in a comment below! You are welcome to comment too if you disagree.

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