Learning Macro 4 - BUS1104 PDF

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1- Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-1990s.Year M2 Nominal GDP 1993 3,482 $6,657. 1994 3,498 7,072. 1995 3,642 7,397. 1996 3,820 7,816. 1997 4,034 8,304.a. Compute the velocity for each year. PY V = (Rittenberg & Tregarthen...

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1- Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-1990s.

Year

M2

1993 1994 1995 1996 1997

3,482.0 3,498.1 3,642.1 3,820.5 4,034.1

Nominal GDP $6,657.4 7,072.2 7,397.7 7,816.9 8,304.3

a. Compute the velocity for each year. PY V=

(Rittenberg & Tregarthen, 2009). M

1993 V = $6,657.4 / 3,482.0 = 1.91 1994 V = $7,072.2/3,498.1 = 2.02 1995 V = $7,397.7/3,642.1 = 2.03 1996 V = $7,816.9/3,820.5 = 2.05 1997 V = $8,304.3/4,034.1 = 2.06 b. Compute the fraction of nominal GDP that was being held as money. 1993 = 1/1.92 = 0.52 1994 = 1/2.02 = 0.495 or 0.50 1995 = 1/2.03 = 0.49 1996 = 1/2.05 = 0.487 or 0.49 1997 = 1/2.06 = 0.485 or 0.49 c. What is your conclusion about the stability of velocity in this five-year period? The conclusion in my opinion that velocity is not stable because it falls on the second year then it increases in following years. Also, if we look at the rate and the fraction of nominal value the money control remains stable across the years starting from 1995 to 1997 which was 0.49. The money declines over time. This shows that cash is frequently used and not controlled within the economy.

2- Here are annual values for M2 and for nominal GDP (all figures are in billions of dollars) for the mid-2000s.

Year

M2

2003 2004 2005 2006 2007

6,055.5 6,400.7 6,659.7 7,012.3 7,404.3

Nominal GDP $10,960.8 11,685.9 12,421.9 13,178.4 13,807.5

a. Compute the velocity for each year PY V=

(Rittenberg & Tregarthen, 2009). M

2003 = $10,960.8/6,055.5 = 1.810 2004 = $11,685.9/6,400.7 = 1.826 2005 = $12,421.9/6,659.7 = 1.865 2006 = $13,178.4/7,012.3 = 1.879 2007 = $13,807.5/7,404.3 = 1.865 b. Compute the fraction of nominal GDP that was being held as money. 2003 = 1/1.810 = 0.55 2004 = 1/1.826 = 0.548 or 0.55 2005 = 1/1.865 = 0.536 or 0.54 2006 = 1/1.879 = 0.532 or 0.53 2007 = 1/1.865 = 0.536 or 0.54

c. What is your conclusion about the stability of velocity in this five-year period? The result from the above calculation and as a conclusion about the stability of velocity in the five-year period, I can say that velocity and fraction of GDP held as money remains stable across the years as in 2003 and 2004 remained 0.55 and there was a slight decline in 2005 which was 0.54 and another slight decline in the following year then the last year it returned back to 0.54.

3- The following data show M1 for the years 2003 to 2007, respectively (all figures are in billions of dollars): 1,306.1; 1,376.3; 1,374.5; 1,366.5; 1,366.5. a. Compute the M1 velocity for these years. (Nominal GDP for these years is shown in problem 2.) Year

M1 $

2003 2004 2005 2006 2007

1,306.1 1,376.3 1,374.5 1,366.5 1,366.5

nominal GDP $ (problem 2) 1,376.3 1,376.3 1,376.3 1,376.3 1,376.3

calculations $ 1,376.3/1306.1 = 1.054 or 1.054 or 1.05 1,376.3/1,376.3 = 1 1,376.3/1,374.5 = 1.001 or 1.00 1,376.3/1,366.5 = 1.007 or 1.01 1,376.3/1,366.5 = 1.007 or 1.01

b. If you were going to use a money target, would M1 or M2 have been preferable during the 2000s? Explain your reasoning. If I look to M1 and M2 and compare them for using a money target, I would choose M1 instead of M2 because M1 preferable during the 2000s. whereas the speed of cash or velocity of money computed M2 remains stable across the years, it's increasing considerably across the years once using M1.

Reference: Rittenberg, L., & Tregarthen, T. (2009). Macroeconomics Principles. https://my.uopeople.edu/pluginfile.php/1015736/mod_resource/content/1/TEXT %20macroeconomics-principles-v2.0.pdf...