Optional · about 10 minutes · repeat it after the course

Starting check

This check is optional and takes about 10 minutes. It has ten short questions, one for each area the course covers, from how government spending works to how to test an economic claim.

Nothing is sent anywhere: your answers and results stay in this browser. Take form A now, before you start, and form B after the course. The two forms test the same ideas with different numbers and examples, so comparing them gives you a fair picture of what has changed. Getting some wrong the first time is expected, and every answer comes with an explanation.

Form A · before the course

1Services Australia pays a $1,000 pension into Margaret's account at a Newcastle bank. What happens in the banking system?

Margaret's deposit rises by $1,000, and her bank's settlement balance at the RBA rises by $1,000 as the payment comes from the government's account there.

Right. The government's main accounts are at the Reserve Bank. A payment from them adds to the receiving bank's exchange settlement balance and to the customer's deposit at the same time. The RBA describes government payments this way.

The $1,000 is moved out of other taxpayers' bank accounts into Margaret's.

No one else's deposit falls when the payment is made. Taxes paid earlier went into the government's account at the RBA, outside the commercial banking system. The payment comes from that account, so deposits in the banking system as a whole rise.

The RBA prints $1,000 in banknotes and delivers them to her bank.

Government payments are electronic. They move as settlement balances between the government's account at the RBA and banks' accounts there. Banknotes are issued only when people ask their banks for cash.

Her bank lends her the $1,000 and sends the bill to the government.

No loan is involved. The government pays from its own account at the RBA, and Margaret's bank is paid in full in settlement balances.

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Margaret's deposit rises by $1,000, and her bank's settlement balance at the RBA rises by $1,000 as the payment comes from the government's account there.

2The federal government plans to build 20,000 social homes over four years. Which of these is a real-resource constraint, rather than a financial one?

There are not enough bricklayers, electricians and plumbers available without pulling them off other building work.

Right. Workers, materials, land and equipment are real resources. If they are already fully used, extra spending bids up their price instead of producing more homes. Economists of every school treat this as a genuine limit.

The project would add about $15 billion to gross debt.

That is a financial measure. It matters to Treasury and the Parliamentary Budget Office because of interest costs and fiscal rules, but it does not tell you whether the builders and materials exist.

Interest rates on government bonds have risen this year.

Bond yields affect the interest cost of the project, which is a financial and budget question. A real constraint is about whether the physical inputs are available.

The government's account at the RBA is low this week.

This is an operational matter. The AOFM manages the government's cash so that payments can always be made, within the rules Parliament has set. It says nothing about whether the workers and materials exist.

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There are not enough bricklayers, electricians and plumbers available without pulling them off other building work.

3In one year the federal government spends $690 billion and collects $650 billion in taxes and other revenue. Over the same year Australia runs a $15 billion current account deficit with the rest of the world. What is the surplus of Australian households and businesses taken together?

Your answer $ billion

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Answer: $25 billion

The government's deficit is $690 billion minus $650 billion, which is $40 billion: a $40 billion surplus for everyone else. Australia pays the rest of the world $15 billion more than it earns from it, so $15 billion of that surplus goes overseas. Households and businesses keep $40 billion minus $15 billion, which is $25 billion. The three balances always sum to zero. This is accounting; it does not say whether the deficit was the right size.

4In November 2023 the RBA's cash rate target reached 4.35 per cent. According to the RBA, how is a higher cash rate meant to bring inflation down?

Borrowing costs more and saving pays more, so households and businesses spend less; slower spending then eases hiring, wage growth and price rises.

Right. In the RBA's account, higher rates work mainly on demand, through saving and investment decisions, mortgage cash flow, asset prices and the exchange rate. It says the full effect takes one to two years.

It forces businesses to cut their prices directly.

The RBA does not set prices. Higher rates work indirectly: they slow spending, and weaker demand gives firms less room to raise prices.

It reduces how much the federal government is able to spend.

The cash rate does not limit the federal government's ability to make payments. It affects the government's interest costs over time, but the RBA's mechanism runs through private spending.

It fixes supply shortages, such as a lack of shipping containers.

Interest rates act mainly on demand, not supply. That is why the RBA says it can look through temporary supply shocks, and why critics argued rate rises were a blunt tool against the supply-driven part of the 2021–23 inflation.

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Borrowing costs more and saving pays more, so households and businesses spend less; slower spending then eases hiring, wage growth and price rises.

5Floods destroy much of north Queensland's banana crop, and banana prices triple for several months. Other prices are steady and unemployment is unchanged. How would most economists classify this price rise?

A supply shock in one product: a big rise in one relative price that lifts the CPI for a while, but is not on its own sustained, broad-based inflation.

Right. Inflation, in the sense the RBA targets, is a sustained rise in prices across the economy. A crop failure makes one thing scarcer, which is a supply (cost-push) shock. It lifts the CPI for a while, which is why the RBA looks through shocks like this unless they start to spread.

Demand-pull inflation, because people still want bananas.

Demand-pull means total spending running ahead of what the economy can produce. Here demand has not changed; supply has fallen.

Wage-driven inflation, because banana growers will need higher pay.

Nothing in the example involves wages. The price rose because the crop was destroyed.

Inflation caused by the government's budget deficit.

The budget plays no part in a crop failure. Deficits can add to demand, but this rise comes from lost supply in one market.

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A supply shock in one product: a big rise in one relative price that lifts the CPI for a while, but is not on its own sustained, broad-based inflation.

6Jess has $2,000 in her everyday account. Her bank approves a $35,000 car loan and credits it to the same account. At that moment, by how much have total bank deposits risen?

Your answer $

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Answer: $35,000

The bank records a $35,000 loan as its asset and a new $35,000 deposit as its liability. No other customer's balance falls, so total deposits rise by $35,000. The Bank of England and the RBA both describe lending this way. When Jess pays the car dealer, the deposit moves to the dealer's bank but still exists. It disappears only as the loan is repaid.

7Which statement best describes what MMT economists such as Stephanie Kelton and Bill Mitchell argue about a government that issues its own floating currency?

It cannot run out of its own currency, so the real limits on its spending are inflation and the available workers and resources.

Yes, that is their central claim in their own terms. Mainstream economists accept the first half (no forced default in its own currency) but argue that interest costs, institutions and the risk of misjudging spare capacity make the limits tighter than MMT suggests.

It can spend as much as it likes, because inflation is not a real concern.

MMT economists say the opposite: inflation is the limit they stress most. Kelton calls it the real constraint, and Mitchell says all spending risks inflation once idle capacity is used up.

It must collect taxes before it can spend.

This is the view MMT economists reject. They argue a currency issuer spends first and taxes afterwards, with taxes creating demand for the currency and restraining total spending.

It should borrow from overseas lenders to fund its spending.

MMT economists argue against foreign-currency debt, which a government cannot create. Their case rests on a government spending and borrowing only in its own currency.

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It cannot run out of its own currency, so the real limits on its spending are inflation and the available workers and resources.

8Which statement best describes what most mainstream economists, including those at the RBA and Treasury, argue about Australia's federal government debt?

Australia cannot be forced to default on its Australian-dollar debt, but debt still has costs: interest competes with other spending, and large deficits when the economy is at capacity can add to inflation.

Yes. That is the mainstream position in its own terms. MMT economists accept the first part and dispute how much weight the costs deserve, arguing among other things that interest rates are ultimately a policy choice.

Australia could run out of money and default, as Greece did.

Mainstream economists generally do not say this. Greece borrowed in euros, which it does not issue, and in 2012 restructured its privately held debt, which rating agencies treated as a default. Australia's federal government borrows in its own currency. That difference is widely accepted.

The government borrows mainly from China to pay for its spending.

A common claim, but not a mainstream economist's position. Commonwealth bonds are sold in Australian dollars by tender to many buyers in Australia and overseas, and the RBA holds some from its 2020–22 purchases.

Government debt never matters for a country that issues its own currency.

Mainstream economists reject this. MMT economists would not put it so baldly either: they say what matters is inflation and how spending uses real resources.

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9Unemployment has risen to 6 per cent in a downturn. Which pairing correctly matches a policy option with the main argument its supporters make for it?

Job Guarantee: MMT economists argue a fixed-wage public job offer would keep people employed while anchoring wages, instead of relying on unemployment to restrain inflation.

Right. That is the proponents' case. Critics question its inflation effects, cost, administration and whether it would displace existing jobs, and evidence from comparable programs is mixed.

Raising the cash rate: the RBA argues higher rates create jobs quickly in a downturn.

In a downturn the RBA would cut rates, not raise them. Lower rates support spending and hiring; higher rates slow them.

Raising JobSeeker: supporters argue it directly creates public sector jobs.

Raising JobSeeker is income support, not job creation. Some critics of the Job Guarantee, such as David Sligar and Hugh Sturgess, propose raising it alongside hiring public servants on normal terms.

Fiscal stimulus: economists agree it always pays for itself through extra tax.

Part of extra spending can come back as tax through the multiplier, but how much depends on the multiplier's size. 'Pays for itself' is stronger than the evidence supports.

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Job Guarantee: MMT economists argue a fixed-wage public job offer would keep people employed while anchoring wages, instead of relying on unemployment to restrain inflation.

Right. That is the proponents' case. Critics question its inflation effects, cost, administration and whether it would displace existing jobs, and evidence from comparable programs is mixed.

10A commentator writes: "Any family that keeps spending more than it earns ends up broke. The federal government is no different, so it must balance its budget." What is the main weakness in this argument?

A family uses a currency it cannot create, while the federal government issues the Australian dollar, so the analogy skips the key difference, even though the government still faces inflation and other limits.

Right. On the financial point the household analogy misleads, and economists of both schools accept that a currency issuer cannot be forced to default in its own currency. A good reply keeps the real limits in view rather than swapping one oversimplification for another.

Families never actually go broke from overspending.

They can, because they must pay their debts in money they cannot create. That is exactly why the comparison breaks down for the federal government.

Nothing: a government budget works exactly like a household budget.

The analogy misses that the federal government issues the currency its debts are in, cannot be forced to default on them, and sets the tax rules that shape its own income.

The government has no limits at all, so its budget never matters.

This swaps one mistake for another. A currency issuer cannot run out of its own money, but it can cause inflation, run short of real resources, and face legal, political and exchange-rate limits.

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Form B · after the course

1A Sydney super fund buys $10 million of newly issued Treasury bonds at an AOFM tender. What happens when the purchase settles?

The fund's deposit falls by $10 million, its bank's settlement balance at the RBA falls by the same amount, and the government's account at the RBA rises.

Right. Buying new bonds moves money out of the banking system into the government's account at the RBA, the reverse of a government payment. The fund now holds a bond instead of a deposit.

The RBA buys the bonds from the government first and sells them on to the fund.

The AOFM sells bonds by competitive tender to registered bidders. The RBA does not normally buy bonds directly from the government; its 2020–22 purchases were of existing bonds in the secondary market.

Total bank deposits rise by $10 million, because issuing bonds creates money.

The direction is reversed. Buying a new bond reduces the buyer's deposit. It is government spending that adds to deposits and settlement balances.

Settlement balances do not change, because the money just passes from one investor to another.

That describes a trade in an existing bond between two investors, where settlement balances only shift between banks. A new issue moves money to the government's account at the RBA, outside the banking system.

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The fund's deposit falls by $10 million, its bank's settlement balance at the RBA falls by the same amount, and the government's account at the RBA rises.

Right. Buying new bonds moves money out of the banking system into the government's account at the RBA, the reverse of a government payment. The fund now holds a bond instead of a deposit.

2The federal government funds 5,000 extra aged care jobs. A year later, which observation would best show that the plan is running into a real-resource limit?

Aged care providers cannot fill vacancies, and care workers' wages and agency fees are rising quickly across the sector.

Right. Unfilled vacancies and fast-rising pay show the workers are not there to be hired, so extra money mostly bids up prices rather than adding care. The responses are about resources: training, migration, phasing the plan in, or freeing workers from other uses.

The program has added to the budget deficit.

A deficit is a financial outcome. On its own it says nothing about whether workers are available. Treasury and MMT economists differ on how much the deficit itself matters, but neither treats it as evidence of a staff shortage.

A newspaper reports that gross debt has passed $1 trillion.

Debt is a financial stock built up mainly from past deficits. Whether care workers can be found is a separate, real question.

Tax revenue came in below forecast this year.

Revenue is a financial flow that rises and falls with the economy. It does not show whether the aged care workforce exists.

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Aged care providers cannot fill vacancies, and care workers' wages and agency fees are rising quickly across the sector.

3In one year the federal government spends $612 billion and collects $584 billion in taxes and other revenue. Over the same year Australia pays the rest of the world $12 billion more than it earns from it, a current account deficit. What is the surplus of Australian households and businesses taken together?

Your answer $ billion

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Answer: $16 billion

The government's deficit is $612 billion minus $584 billion, which is $28 billion: a $28 billion surplus for the non-government sector as a whole. Of that, $12 billion goes to the rest of the world through the current account deficit. Households and businesses keep $28 billion minus $12 billion, which is $16 billion. The identity tells you the balances add up; it does not tell you what caused them or what they should be.

4Inflation is well above target and the labour market is tight, so the Monetary Policy Board raises the cash rate. Which chain of effects matches the RBA's own account?

Borrowing costs rise, so households and businesses spend and invest less; hiring and wage growth then slow, and inflation eases over one to two years.

Right. The RBA's mechanism works on demand, with long lags. It expects unemployment may rise somewhat as a side effect, which is where its critics focus.

Banks have fewer reserves to lend out, so the money supply shrinks by a fixed multiple and prices fall.

This is the 'money multiplier' story the Bank of England calls misleading. Banks do not lend reserves to households; higher rates work by making loans dearer and less attractive.

The federal government must cut its spending to match, which brings inflation down.

Monetary and fiscal policy are set separately. A higher cash rate does not require the government to cut spending, though both affect total demand.

Businesses' interest costs rise, so they cut prices to keep customers.

Higher costs, if anything, push prices up in the short run. The RBA's channel is weaker spending, which reduces firms' room to raise prices.

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Borrowing costs rise, so households and businesses spend and invest less; hiring and wage growth then slow, and inflation eases over one to two years.

Right. The RBA's mechanism works on demand, with long lags. It expects unemployment may rise somewhat as a side effect, which is where its critics focus.

5For a year, households, businesses and governments all spend strongly. Unemployment is very low, firms in many industries say they cannot find staff, and most say they can raise prices without losing customers. What does this best fit?

Demand-pull inflation: total spending running ahead of what the economy can produce.

Right. Broad price rises with a very tight labour market are the classic sign of demand outrunning capacity. Real episodes usually mix demand and supply, which is why economists argue about the shares.

A supply shock in one industry.

A supply shock hits particular products, such as fuel or food. Here the pressure is broad and comes with strong spending and scarce workers, which points to demand.

Deflation.

Deflation is a fall in the general price level. Here prices are rising across many industries.

Rising profit margins with no change in demand.

Margins may rise in a period like this, but the example describes strong demand and shortages across the economy. Whether profits drive inflation or reflect strong demand is exactly what economists dispute about 2021–23.

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Demand-pull inflation: total spending running ahead of what the economy can produce.

6Ravi has a $22,000 personal loan and $30,000 in his transaction account, both with the same bank. He uses $9,000 from the account to pay down the loan. By how much have total bank deposits fallen?

Your answer $

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Answer: $9,000

Paying down the loan takes $9,000 off Ravi's deposit and $9,000 off his loan. Both sides of the bank's balance sheet shrink, so $9,000 of deposits no longer exists anywhere. Ravi now owes $13,000 and has $21,000 in his account. Lending creates deposits; repayment destroys them.

7Someone asks an MMT economist: "Can the federal government afford a $15 billion rail line?" Which answer best matches how MMT economists argue?

In dollars, yes, because it issues the currency. The real question is whether the workers, steel and machinery are available without pushing up prices, and taxes may be needed to free them up.

Yes, that is MMT's framing in its proponents' own terms: 'how will we resource it?' instead of 'how will we pay for it?'. Mainstream economists would add interest costs, fiscal rules and the risk of misjudging spare capacity.

Yes, and there is no need to think about inflation or other projects.

MMT economists treat inflation as the binding limit, and ask what else the same workers and materials could be doing.

Only if taxes are raised by $15 billion first.

MMT economists argue a currency issuer spends first and taxes afterwards. They may still support tax rises to make room for a project, but not as a precondition for paying.

Only if bond markets agree to lend the money.

Under Australia's current rules the AOFM does issue bonds when spending exceeds revenue. MMT economists argue those rules are a choice and that bonds are not financially necessary for a currency issuer; Treasury sees the arrangement as a deliberate safeguard.

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In dollars, yes, because it issues the currency. The real question is whether the workers, steel and machinery are available without pushing up prices, and taxes may be needed to free them up.

8A mainstream economist is asked about a plan to run larger deficits for ten years to fund new infrastructure. Which response best represents mainstream reasoning?

It can be worthwhile if the projects are good, but watch whether debt is stable or falling as a share of GDP, what the interest will cost if rates rise, and whether extra spending adds to inflation near capacity.

Yes. That is how Treasury and the Parliamentary Budget Office frame sustainability, and how most mainstream economists weigh deficits. MMT economists would put the inflation test first and give the debt ratio little weight.

Never: any deficit is irresponsible.

Few mainstream economists hold this. Treasury notes that deficits widen automatically in downturns, cushioning the economy, and Australian budgets have broadly followed the economic cycle.

Yes: debt in your own currency has no costs at all.

Mainstream economists argue debt does have costs, mainly interest and possible inflation risk, even though default in Australian dollars is not the concern.

No: the RBA would have to approve the extra borrowing.

The RBA does not approve government borrowing. Parliament authorises spending, and the AOFM issues bonds by tender.

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9Rents in a regional city have jumped 20 per cent in two years. Which pairing correctly matches a policy option with the main argument made for it in this course?

Planning reform to allow more homes: the Grattan Institute and RBA researchers argue more homes relative to population lower rents and prices compared with what they would otherwise be.

Right. That is the supply case at its strongest. Cameron Murray disputes how much rezoning speeds up building, and everyone agrees it works slowly.

A permanent rent freeze: Cameron Murray argues rents should never rise.

Murray supports limiting how fast rents rise, spreading big increases over several years, not a freeze. The Grattan Institute opposes freezes and hard caps.

Abolishing the capital gains discount: the Grattan Institute estimated it would roughly halve house prices.

Grattan, which supported reform, estimated that halving the discount and limiting negative gearing would leave prices only up to 2 per cent lower than otherwise.

Raising interest rates: the RBA sets the cash rate to cool rents in particular cities.

The cash rate is set for the whole economy, to meet the RBA's inflation and employment goals. It cannot be aimed at one city's rents.

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Planning reform to allow more homes: the Grattan Institute and RBA researchers argue more homes relative to population lower rents and prices compared with what they would otherwise be.

Right. That is the supply case at its strongest. Cameron Murray disputes how much rezoning speeds up building, and everyone agrees it works slowly.

10A social media post says: "Government debt is like a maxed-out credit card. Every Australian now owes tens of thousands of dollars that we will have to pay back." What is the main weakness in this argument?

Nobody receives a personal bill: the debt is in Australian dollars, which the government issues, and the bonds are also assets held by super funds, banks and others. The analogy hides this, though interest costs are real.

Right. The card analogy treats public debt like a household's debt to a lender. Mainstream and MMT economists both reject the personal-bill framing, while disagreeing about how much the interest cost matters.

Government debt does not really exist; it is only an accounting trick.

Commonwealth bonds are real legal obligations, and interest is paid on them. The weakness is in the analogy, not in the existence of the debt.

Nothing: each Australian will be sent a share of the debt to repay.

There is no personal bill. Bonds are repaid or rolled over into new bonds when they mature, and interest is part of the budget like other spending.

The only problem is that the number quoted is too high.

Getting the number right would not fix the analogy. The problem is treating debt in the government's own currency, much of it held by Australians, as a personal credit card balance.

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