ECOS3010: Assignment 2 (Total: 20 marks) Due 11:59 pm, Friday, May 23
(Week 12), 2025
1. This assignment must be turned in on the day it is due. Work not
submitted on or before the due date is subject to a penalty of 5% per calendar day
late. If work is submitted more than 10 days after the due date, or is submitted
after the return date, the mark will be zero. This assignment is worth 10% of total
weight.
2. TYPE your work including all mathematical equations. The
assignment must be submitted as a typed PDF file, with no exceptions. Untyped
work will not be graded and will receive a mark of zero. If any question requires a
graph, you are encouraged to use any software to create the graph and include it
as a figure in the PDF. if you encountrer specific difficulties using software, you can
draw the graph by hand, but it must be clearly presented. Do not forget to include your
name and SID.
3. Ensure that working process is clearly articulated, demonstrating your under-
standing and methodology. Detailed and logical presentation of the process is crucial
and helpful for solving the problem and earning full credit.
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PROBLEM 1. (10 Marks) Economists measure the velocity of money as
P Y/M , where P represents the general price level, Y is real output, so that PY
denotes nominal output (i.e., nominal GDP) and M represents the nominal
money supply. The ratio P Y/M indicates the frequency at which a unit of money is
used to purchase final goods and services included in nominal GDP. For this
problem, we explore how the velocity of money has changed in Australia over recent
decades, from March 2004 to December 2024 using money supply measured by
Broad Money. We then use the empirical findings to examine if the quantity
theory of money holds in Australia. Please submit your data (keeping three
decimal places) as an appendix at the end of the PDF to your assignment.
(a) Exploit data from Australian Bureau of Statistics to find nominal output
P Y . In particular, you can use data series 5206.0 (Table 3, Column CG, Series
ID:A2304418T) to find quarterly Gross Domestic Product (P Y ). [2 marks]
(b) From the Statistics Tables of the Reserve Bank of Australia, find money supply (see
Monetary Aggregates) M measured by Broad Money (Table D3, Column M, Series
ID:DMABMS). Please convert the monthly data into quarterly data by keeping the values of
money supply for March, June, September and December in each year. [2 marks]
(c) Calculate the velocity of money P Y/M. Plot the time series for the velocity in a single
chart. Note that output is measured in millions of dollars and money supply is measured in
billions of dollars. Use both series in same units (billions) for consistency. Use time quarters
as the x-axis and velocity of money as the y-axis in your time series plot. [2 marks]
(d) From your plot in part (c), how do velocity of money change over time? Can
you offer an explanation to rationalise your findings? Explain. [2 marks]
(e) What does the quantity theory of money suggest? Do the empirical findings
you obtain from part (c) and part (d) support the quantity theory of money in
Australia? Explain [2 marks]
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PROBLEM 2. (10 Marks) Consider the OLG model in Problem 1 of Assign-
ment 1. Suppose that the United States (country 1) and Malaysia (country 2) have
foreign currency controls in effect. The demand for money is growing at α1n1 percent in
the United States and at α2n2 percent in Malaysia (net rates) each period. The money
supplies in the United States and Malaysia are growing at z1 and z2 percent (net rates)
in each period, respectively.
(a) Define the exchange rate (et) as in our lectures. What are the units in which
the exchange rate is measured: U.S. dollars per Malysian Ringgit or Malaysian
Ringgit per U.S. dollar? [1 mark]
(b) Using the database developed by the World Bank (World Development Indi-
cators Link), find the data for two countries over the past decades to determine the
values for α and n. What is the rate of return on money in the U.S.? In Malaysia?[Hint:
Use the data from 2005 to 2023. For simplicity, employ the arithmetic mean for GDP
growth (annual %), population growth (annual %) and broad money growth (annual
%), and round the final result to four decimal points.) [2 marks]
(c) In a system of flexible exchange rates, what i s the t ime path of the exchange
rate between the U.S. and Malaysia (et+1/et) from our model? Review the
exchange rate data using the Malaysian Ringgit to U.S. Dollar Spot Exchange Rate.
(Use the 'Edit Graph’ function in the provided link to correctly select the annual
end-of-period data. Ensure that you choose the appropriate time frame to align
with our model. Additionally, normalize the values to 100 as of the date
2005-01-01.) Based on this real-world data, do you believe the theoretical model
aligns with the observed trends? Provide a brief explanation to support your
assessment. [3 marks]
(d) On July 6, 2023, Bank Negara Malaysia (BNM) raised the overnight policy rate
to 3%, ending a period of accommodating monetary policy used during the pandemic.
This tightening was aimed at curbing inflation and stabilising the exchange rate.
Given this change, and holding all other factors constant, which variable in our
economic model for Malaysia has been impacted? Should the value of this
variable be expected to increase or decrease relative to its previous level? [2 mark]
(e) How does above changing factor affect t he t ime p ath o f t he e xchange r ate in
our model? [2 marks]
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