Economic Knowledge (4) — External Balances, Money Supply and Inflation, Private Borrowing

Image credit.

Continued from Economic Knowledge (3).

1. The private domestic sector cannot save if a nation's external sector is in balance (and thus making no contribution to real GDP growth) and the government runs a balanced fiscal position.

True
False

My answer: False.

My explanation:   

As a matter of accounting, when one of the three sectors (government, non-government, and external) is in surplus, at least one of the other two must be in deficit. For the private sector to (net) save ( = build up, as a sector, a surplus of S - I > 0), at one other sector must be in deficit, which is, per quiz-assumption, not the case. Hence, under the stated conditions, the private sector cannot be saving / be in surplus.

Die Salden-Mechanik besagt definitorisch: wenn einer der drei Sektoren (Staat, Nicht-Staat, und Ausland) einen Überschuss verzeichnet, muss mindestens einer der beiden anderen Sektoren ein Defizit aufweisen. Soll der Privatsektor ein Netto-Sparer sein, d.h. soll er einen Überschuss (S - I > 0) ausweisen, muss sich wenigstens ein andere Sektor (Staat und/oder Außenwirtschaft) im Defizit befinden, was bei dieser "Prüfungs-"Aufgabe voraussetzungsgemäß nicht der Fall ist.

2. Continually expanding the money supply will inevitably be inflationary.

True
False

 
My answer: False.

My explanation: 

A healthyly growing economy (with no episodes of exaggerated inflation) will tend to be accompanied by a growing money supply, both in the realtive short-term and over longer historical periods. What matters is not the money supply per se, but its relationship with the level of capacity utilization in the economy. If productivity gains are sensibly shared between capital (profits) and labour (wages), growth may be continuous, even in the face of full employment, and a growing, non-inflationary money supply will be observed. 

In fact, I would expect economic growth in modern times to be credit-driven, and hence accompanied by an expanding money supply.

Was zählt ist nicht die Geldmenge per se, sondern das Verhältnis in dem die Geldmenge zum Auslastungsgrad der Wirtschaft steht.

3. By voluntarily issuing debt to match its net spending, government borrowing from the private domestic sector reduces, but does not eliminate, the risk that public deficits will be inflationary.

True
False

My answer: False
My explanation:

Government spending is not dependent on government borrowing from the private sector and hence, in principle, cannot be (inflation-)constrained by cautioning private lenders. Only subject to voluntary/political and resource constraints, the government can spend as much as it likes, on any projects it chooses to dedicate itself to. Whether its spending is inflationary or not, depends on the projects it chooses to support with its spending and the economy's level of activity at the time in question. Whether it borrows or not, the government may or may not embark on inflationary spending. If its decides to borrow, there will always be private bond investors happy to take advantage of a riskfree source of income. A borrowers' strike to prevent inflation is not likely.

Ob Staatsausgaben inflationär wirken, ist eine Frage des Zustands der Wirtschaft. Private Investoren haben weder die Macht (funktional), noch das Interesse, durch Enthaltsamkeit am Anleihe-Markt die Staatsausgaben einzudämmen. Sie sind immer dankbarer Abnehmer einer risikolosen Einkommensquelle.

The correct answer will be available tomorrow at the source.


Continued here.