This page is a place holder for Frequently Asked Questions (FAQs) about Modern Money Mechanics and Dynamics. It is also known as Modern Monetary Theory (MMT). Place your questions in the comments section and we will update this page over time.
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Many of our blog posts are sourced from other people’s work and where a commenting facility is available on the original work it is our preference that you post your queries there. There will be commenting facilities available on other Modern Money Mechanics blog posts.
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The LayPerson category is there for the people with little to no knowledge of economics and wishes to learn how macroeconomics works in the real world.
The Economics category contains blog posts that are at the more pointy end of macroeconomics and the readers of this category may have some knowledge of economics.
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What does non-convertibility mean?
If a Government makes no commitment to exchange its currency for gold or any other currency at a fixed exchange-rate, it is said to be “non-convertible”. The US dollar, Australian dollar and UK pound sterling are all examples of non-convertible currencies. Note that non-convertibility does not mean that the currency cannot be traded for other currencies. For example, the Australian dollar can be readily traded for US dollars at an exchange rate that moves up and down with market supply and demand.
What are flexible exchange rates?
A floating flexible exchange rate is where a sovereign government that issues its own currency allows its currency to be traded for another currency (eg. Australian Dollars for US dollars) at an exchange rate that moves up and down with market supply and demand i.e. a desire to voluntary acquire another country’s dollar/currency.
You state that in a fiat currency system the government does not need to finance spending in which case the issuing of debt by the monetary authority or the treasury has to serve other purposes. What purposes?
The central bank operations aim to manage the liquidity in the banking system such that short-term interest rates match the official targets which define the current monetary policy stance.
What is interbank competition?
Money markets are where commercial banks (and other intermediaries) trade short-term financial instruments (cash, bonds, etc.) between themselves in order to meet reserve requirements or otherwise gain funds for commercial purposes. This is interbank competition.
How are Interest Rates set?
Interest rates are set by the policy target of the government of the day.
What is the overnight rate and what does the overnight rate mean?
The overnight rate is generally the rate that large banks use to borrow and lend from one another on the overnight market.
What is the support rate and what does the support rate mean?
The support rate is the rate which is paid on these commercial bank reserves.
What is a budget deficit?
Budget deficit: annual amount by which government spending exceeds tax revenues
What is a budget surplus?
Budget surplus: annual amount by which tax revenues exceed government spending
What does National debt mean?
National debt: total accumulation of all previous deficits (minus any surpluses)
What does Trade Deficit mean?
Trade deficit: annual excess of imports over exports
NOTE: State and local government budgets are analogous to household ones!