ECOS3010: Assignment 1 (Total: 50 marks) Due 11:59 pm, Friday April 23,
2021
1. Homework 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. Each assignment is worth 10% of total weight.
2. TYPE your work (including all mathematical equations). Homework is
submitted as a typed .pdf le, no exceptions. Untyped work will not be marked and will
receive a mark of zero. You can draw a graph by hand, scan it, and include it as a gure in
the PDF. Please dont forget to include your name and student number.
question 4 marks)
1. A permanent increase in money supply cannot a¤ect any variable in the OLG model
of money.
2. In the OLG model of money, at money does not pay interest, so moneys rate of
return is 1.
3. Suppose that the government nances its expenditure through seigniorage revenue.
There exists an upper limit on the amount of the seigniorage revenue that can be generated.
4. The original Phillips curve nds that there is a negative correlation between ination
and output growth.
5. The Lucas critique indicates that the government can use a random monetary policy
to stimulate output.
6. (10 marks) Read the article on Digital Currencies, Stablecoins, and the Evolving
Payments Landscapeby Lael Brainard.
https://www.federalreserve.gov/newsevents/speech/brainard20191016a.htm.
Discuss similarities and di¤erences among a rst-generation cryptocurrency such as the
bitcoin, a stablecoin such as Facebook Libra and a central bank digital currency. You can
words.
7. (10 marks) Understanding ination and real money demand in Australia. Economists
propose one way to measure real money demand by M=PY , where M and PY are money
supply and output in nominal terms. The ratio M=PY measures money demandin the
sense that it gives the desired real money balances M=P after adjusting for the level of
output Y . In this question, we explore how money demand by this denition depends
on the ination rate using Australian data from 1975 to 2018. Please submit your data
(keeping three decimal places) as an appendix to your assignment.
(a) Use data from Australian Bureau of Statistics to nd nominal output PY and the
ination rate. In particular, you can use data series 5206.0 (Table 3, Column CG) to nd
quarterly Gross Domestic Product (PY ) and data series 6401.0 (Tables 1 and 2, Column
AB) to nd quarterly ination measured by percentage change of CPI.
(b) From the Statistics Tables of the Reserve Bank of Australia, nd money supply M
measured by M1 in Table D3, Column K. Please convert the monthly data into quarterly
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data by keeping the values of money supply for March, June, September and December in
each year.
(c) Calculate real money demandM=PY and plot it against ination. (Note that output
is measured in millions \$ and money supply is measured in billions \$. It might be useful
to convert them into the same units.) Please use ination as the x-axis and real money
demand as the y-axis in your scatter plot. If you t a linear trendline in your plot, what is
the relationship between real money demand and ination?
(d) How can we use the theory we developed in class to rationalize the observed rela-
tionship between real money demand and ination?
8. (10 marks) The original Phillips curve shows the correlation between ination and
unemployment. Since unemployment and output growth are usually negatively correlated,
economists also examine the correlation between ination and output growth.
(a) Using the database developed by the World Bank (World Development Indicators:
http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators).
Find annual data on the ination rate (consumer prices annual %) and the GDP growth
(annual %) for Australia and the US from 1961 to 2016. Plot the correlation between
ination and GDP growth in each country. Please use GDP growth as the x-axis and
(b) Using the same database, nd as many countries as possible for 1965 and
for 2015. Plot the correlation between ination and GDP growth in each year (1965 and
2015). Again please use GDP growth as the x-axis and ination as the y-axis in your plots.
Add a trendline in each of your plot. (Hint: you may nd one or two countries might have
extreme values of ination. You may consider taking out these outliers when you plot the
correlation.)
(c) The original Phillips curve identies a negative correlation between ination and
discuss how to rationalize the nding from the original Phillips curve and the contradicting
evidence using the theory we develop in class.
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