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 file, 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 figure in the PDF. Please don't forget to include your name and student number.

        3. Carefully explain your work.

        Question 1-5. Answer True, False or Uncertain. Briefly explain your answer. (each question 4 marks)

        1. A permanent increase in money supply cannot affect any variable in the OLG model of money.

        2. In the OLG model of money, fiat money does not pay interest, so money's rate of return is 1.

        3. Suppose that the government finances 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 finds that there is a negative correlation between inflation 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 differences among a first-generation cryptocurrency such as the bitcoin, a stablecoin such as Facebook Libra and a central bank digital currency. You can use additional references that you find and please list your references. Word limit: 500 words.


        7. (10 marks) Understanding inflation 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 definition depends on the inflation 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 find nominal output PY and the inflation rate. In particular, you can use data series 5206.0 (Table 3, Column CG) to find quarterly Gross Domestic Product (PY) and data series 6401.0 (Tables 1 and 2, Column AB) to find quarterly inflation measured by percentage change of CPI.

        (b) From the Statistics Tables of the Reserve Bank of Australia, find money supply M measured by M1 in Table D3, Column K. Please convert the monthly data into quarterly data by keeping the values of money supply for March, June, September and December in each year.

        (c) Calculate real money demand M/PY and plot it against inflation. (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 inflation as the x-axis and real money demand as the y-axis in your scatter plot. If you fit a linear trendline in your plot, what is the relationship between real money demand and inflation?

        (d) How can we use the theory we developed in class to rationalize the observed rela-tionship between real money demand and inflation?


        8. (10 marks) The original Phillips curve shows the correlation between inflation and unemployment. Since unemployment and output growth are usually negatively correlated, economists also examine the correlation between inflation 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 inflation rate (consumer prices annual %) and the GDP growth (annual %) for Australia and the US from 1961 to 2016. Plot the correlation between inflation and GDP growth in each country. Please use GDP growth as the x-axis and inflation as the y-axis in your plots. Add a trendline in each of your plot.

        (b) Using the same database, find as many countries as possible for 1965 and for 2015. Plot the correlation between inflation and GDP growth in each year (1965 and 2015). Again please use GDP growth as the x-axis and inflation as the y-axis in your plots. Add a trendline in each of your plot. (Hint: you may find one or two countries might have extreme values of inflation. You may consider taking out these outliers when you plot the correlation.)

        (c) The original Phillips curve identifies a negative correlation between inflation and unemployment. In your plots above, have you found contradicting evidence? Please briefly discuss how to rationalize the finding from the original Phillips curve and the contradicting evidence using the theory we develop in class.