Economic Knowledge (1) — Austerity & Sectoral Balances, Reserves & Lending, Funding & Inflation,

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I have answered the below three questions posed by Bill Mitchell in his weekly quizz:

1. A program of fiscal austerity which yields a fiscal surplus will always undermine attempts by the private domestic sector to save overall when the nation's exports are less than the sum of their imports and net income flows.

True or false? My answer: True.

Brief explanation of my answer: 

In a world consisting of government and private sector alone, if the government is in surplus, the private sector must be in deficit. In an open economy, the private sector might build a surplus itself, shifting the burden of a deficit to the rest of the world, by creating an export-based private sector surplus (forcing a deficit on the net-importing rest of the world); but this option is ruled out in the question.

2. The more funds that commercial banks have on account with the central bank the greater is their capacity to provide loans to customers. 

True or False? My answer: False. 

Brief explannation of my answer:

If there is insufficient demand for loans in the economy or if there is a paucity of creditworthy borrowers, no amount of bank reserves with the central bank will enhance the banks' "capacity to provide loans to customers."

3. If governments sought funding from the central bank for their net spending (deficits) rather than private bond markets then the inflation risk of such spending would remain unchanged.

True or false? My answer: True. 

Brief explannation of my answer:

Government does not depend on a private bond market for its ability to net spend. By implication, if a government decided to finance its net spending in the absence of a private bond market, ipso facto it would lose neither its ability to net spend judiciously — and avoid building inflationaty pressure — nor to net spend stupidly — and create inflationary pressure. 

Bill Mitchell's (fully spelled out) answers are not yet out, being due tomorrow. However, my true-false replies (not necessarily my explanations) are correct, as you may want to check here.

Continued here.