FINC5090 Group Assignment - Semester 1, 2022
Quantitative Tightening, Balance of Payments and the Foreign Exchange
Due 11.59pm 12th May, 2023
NOTE: Ensure that your exposition based on references are paraphrased and corresponding references are
cited. Otherwise, it may be red flagged by Turnitin and Academic Dishonesty team will investigate your
case.
It is recommended not to leave your submission time until the few minutes before the deadline. Murphy's
law tells us that technical issues tend to occur around that time.
Task 1 – Quantitative tightening (max 500 words, 20 marks)
a. What is quantitative tightening? (5 points)
b. What is the direct effect of quantitative tightening on the balance sheets of commercial banks? (5 points)
c. Why does the Federal Reserve increase rates before they start the quantitative tightening process? (5
points)
d. How do you expect the quantitative tightening process to occur regarding the monetary policy during the
October 2017 - July 2019 period? (5 points)
Task 2 - The influence of quantitative tightening in 2022 on the yield curve (max 500 words, 20 marks)
a. Explain how quantitative tightening could influence the yield curve. You are not expected to provide any
empirical evidence when answering this question. (6 points)
Visit
https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yield and download the appropriate data to answer parts (b) and (c).
b. Generate three yield curves and label each graph clearly:
i. one for the date immediately before the January 2022 Federal Reserve announcement for
“Principles for Reducing the Size of the Federal Reserve's Balance Sheet”; (2 points)
ii. one for the date right after the statement was made; and, (2 points)
iii. one for the date one year after the statement was made. (2 points)
c. Explain whether the changes of the yield curve around the January 2022 Federal Reserve statement are
consistent with your expectation developed in part (a). (4 points)
d. Why does the yield curve one year after the announcement exhibit a different shape? Provide a brief
justification. (4 points)
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Task 3 - The influence of interest rate on money supply and inflation (max 500 words, 25 marks)
Visit https://www.federalreserve.gov/. Download the “M1, M2 and other Release Data” file from Data ->
Money Stock Measures – H.6 -> .
Visit https://fred.stlouisfed.org. Download the data series “Consumer Price Index: All Items for the United
States” (CPALTT01USM657N) AND the data series “Federal Funds Effective Rate” (DFF).
Use the data in Colums L, M, S, T and U only to create Table 1. Use the consumer price index data to create
Table 2. Use the federal fund rate data to create Table 3. For all three tables, use the data reported between
November 2015 - July 2019. Answer the questions below.
a. Which measure in columns L, M, S, T and U is the most sensitive to (i.e. most directly influenced by)
the change in interest rate? You should provide a theoretical justification first. Then you should use the data
in Table 1 to validate your justifications. You should make your own decision on how to display/visualise
the changes of ALL available measures. (5 points)
b. Use the data in both Table 1 and Table 2, compare the changes in money base, broad money and CPI. (6
points)
c. Why are the changes of M2 during the November 2015 - July 2019 period not in proportion to the
changes of the measure you chose in Part (a)? (6 points)
d. Discuss the general relationship between interest rate, money supply and price level. Use the data in part
(b) to support this discussion. (8 points)

Task 4 - The influence of interest rate changes on balance of payment and foreign exchange rates
(max 500 words, 25 marks)
a. Discuss the influence of the Federal Reserve’s rising interest rate policy on the short-run exchange rate
between the Canadian dollar (CAD) and the US dollar (USD). Make necessary assumptions. Do the data
on the U.S and Canada interest rates (see supplementary Canada interest rates.xlsx), the CAD/USD
exchange rate (Data series “DEXCAUS” from https://fred.stlouisfed.org) support your theoretical
discussion? (10 points)
b. Discuss the relationship between interest rate and balance of payment (5 points)
c. Visit https://fred.stlouisfed.org. Download the data series “International Trade: Exports: Value (Goods):
Total for Canada” (CANXTEXVA01CXMLM) and “International Trade: Imports: Value (Goods): Total
for Canada” (CANXTIMVA01CXMLM).
Discuss the trend in imports and exports from November 2015 - July 2019. Do the data support your
theoretical discussion in part (b). (10 points)
Task 5 – Applicable to Overall Report: References, Structure and Presentation (10 marks)
Maximum length of assignment: 2000 words excluding cover/ title page, tables, graphs, figures, reference
list and appendix. Penalties for going over the word limit will be applied as per faculty assessment policy.
The appendix section does not have a word limit.
Do NOT include executive summary, introduction or conclusion sections. These sections will not be
marked.
Include a cover/ title page showing the list of student IDs of all group members. Do not include names.
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Formatting requirements: single line spacing, 2 cm margins and 11 point font size. Tables, charts and figures
should be clearly labelled.
Penalties apply for poorly presented work.
You must label your answers to each part of the tasks clearly. (e.g. Task 1, Task 2, a. b., etc.).
Referencing: You are expected to use academic references to support your analysis and arguments.
Citations and the reference list must be prepared following the Business School Referencing Guide
(http://docshare04.docshare.tips/files/24141/241413957.pdf). It is ideal to employ at least three references
to justify your arguments.
Writing: The logic of the answers must be easy to follow. There are expected to be no spelling or
grammatical errors and terminology should be clearly defined.
Professional presentation is highly encouraged.
Submit ONE word document ONLY. This document should include the main body of the report and
complementary materials in the Appendix.
TOTAL MARKS = 100
Marking criteria
The criteria below will be followed when marking each part of the assignment:
1. The extent and quality of critical reasoning/critical thinking.
2. The demonstration of knowledge of relevant theory.
3. The successful usage and interpretation of relevant data .
4. The extent to which the work is clearly, concisely and professionally presented.
Weight of Final Mark: This assignment will be marked out of 100 marks and will be scaled to account for
25% of the total assessment marks.
Resources
The Federal Reserve (https://www.federalreserve.gov/) provides economic and financial data including
money supply, interest rates, exchange rates, etc. You can find useful macro-economic data on the website
of the US Bureau of Economic Analysis (https://www.bea.gov/).
You can search for academic references in ProQuest
(http://ezproxy.library.usyd.edu.au/login?url=https://search.proquest.com/pqcentral/advanced) or Google
Scholar (https://scholar.google.com.au/)