ECON 301 GWU Intermediate Macroeconomics Questions

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ECON 301: Homework 5
Instructions
 How to submit
 However, you must submit your PDF file online on Canvas using the
online submission tool
 You can convert hand-written pages to PDF using simple apps like
CamScanner, Office Lens etc. Alternately, there is a scanner available at
the Library.
 General guidelines
 Answers must be clear, concise and legible (if hand-written). They
must demonstrate how you arrived at the solution, and make it clear
that you understand the underlying concepts.
 Your submitted work must be original and submitted individually,
although you may work in groups to arrive at solutions. Academic
integrity is taken very seriously Monetary Base and Money Supply
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The following graph shows the evolution of the monetary base, M1 and M2.
Figure 1: Evolution of the monetary base, M1 and M2 (2007=100)
1. What forces determine the money supply aggregates?
2. Explain the evolution of these series (Hint: note that these series are
expressed in index value).
3. How are the money multipliers related to M1 and M2? Which of the two
multipliers is higher after 2008? Can you explain why?
4. Do you think this graph gives information about the effectiveness of
monetary base expansions during recessions? If so, why?
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Understanding and Calculating Inflation
Figure 2: Real and nominal interest rates in the US, 1960-2015
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1. Consider Figure 2. How can positive nominal interest rates and negative real
interest rates occur simultaneously? Identify two periods when this
situation happened and provide some macroeconomic context for each of
them.
2. In Figure 2, we observe that the nominal interest were zero (or very close to
zero) after the financial crisis of 2008. i) Why was the nominal interest so
low? ii) Do you think that the Fed could have set the nominal interest below
zero?
2
Velocity of Money
1. In our class notes, when we explain the quantity theory of money, we
assumed that velocity of money was constant and output was exogenously
given in order to derive a long-run relationship between the price level and
the money supply. However, the velocity of money is not constant in the
short and medium run. The following graph shows the velocity of M1 Money
Stock for the US. i) Explain what an increasing and a decreasing velocity of
M1 might indicate. ii) Why has the velocity of money collapsed during the
Covid-19 crisis?
Figure 3: Velocity of M1 Money Stock
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Discussion Questions
1. What do we mean by a Central Banks independence? Why is it important
for a Central Bank to be independent?
2. What do you think the 2012 Nobel Prize winning economist Thomas Sargent
mean when he says that persistent inflation is everywhere and always a
fiscal phenomenon? (Hint: This was said in the context of government budget
constraints)
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3. Provide a short summary of the Quantity Theory of Money. Why is it a
Theory and not an identity (Hint: Think what is a theory)
4. Do you believe that the way the US manage its monetary policy affects
inflation rates around the world? Explain why or why not.
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