for prof washington

profiledaeillexinyi
econ321s2017assignment10.docx
Home>Business & Finance homework help>Economics homework help>for prof washington

ECON 321 SPRING 2017: INDIVIDUAL ASSIGNMENT 10 DUE MARCH 28th, 2017 BY THE START OF CLASS

Name

Student Number

Group Name

Honor Code: I guarantee that all the answers in this assignment, except those for the question specifically marked as a group discussion question, are entirely my own work. I have cited any outside sources that I used to create these answers in such a way that the TA or instructor can look them up.

Name or Signature for Honor Code: ______________________________________________

The table below is for TA use only.

Question

Marks

Out of

1

a

 

12

b

 

2

2

a

 

5

b

 

2

c

 

5

d

 

2

3

a

 

8

b

 

6

Total

 

42

1. [Reading] Read ‘Why Did the Bank of Canada Emerge in 1935?’ (13 pages).

a. (12 marks) Write a 3-2-1 report in the usual fashion, using the form provided on Coursespaces.

Question 1

What are the 3 most important concepts, ideas or issues in the reading?

Briefly explain why you chose them.

Question 2

What are the 2 concepts , ideas or issues in the article that you are having the most difficulty understanding, or that are missing but should have been included?

Briefly explain what you did to correct the situation (e.g. looked up an unfamiliar word or a missing fact), and the result.

Question 3

If you could ask the author 1 question, what would it be? Whyis this question important?

b. (2 marks) According to Muharem Kianieff,

“A number of facts appear to be inconsistent with Bordo and Redish’s conclusions. … [T]he Bank did not have complete control over the money supply until 1950, when its notes became the sole circulating medium. Provision also had to be made for the accumulation of central reserves by the Bank before it could effectively engage in monetary policy. … Bordo and Redish also failed to consider the fact that central banking was a relatively new phenomenon in Canada, and that it would take the Bank of Canada some time to master many of the tasks typically performed by a central bank.” (p. 443)

In what way are these facts inconsistent with Bordo and Redish’s conclusions, and how would you expect the article’s conclusions to change if they were taken into account? Explain briefly.

2. [‘Raphing] An ECON 321 student was curious about the relationship between the Canadian money supply and inflation, so for this question, you’ll be investigating that connection, as well as changes in how quickly money changes hands (the velocity of money).

You’ll be using data on M2, a broad measure of money commonly used by banks and economists. The paper from which I’ve drawn the historical data defines various measures of the money supply as follows:

M1: “currency in the hands of the public … and demand deposits” (p. 107)

M2: “M1 … plus personal savings deposits and non-personal notice (chequing and non-chequing) deposits.”(p. 107)

a. (5 marks) Calculate the year-on-year inflation rate and % change in the money stock for 1914 – 1966 (or 1946 – 1955 if doing it by hand). Plot inflation and % change in the money stock as separate lines on a line graph with % change on the vertical axis and Year on the horizontal axis. Please use the following formula for % change year on year:

Thus, if the money supply in Year 9 is 100, and in Year 10 it is 150, the % Change in the Money Supply for Year 10 is (150 – 100)/100 = 50/100 = 50%. Inflation is the % change in the CPI, and can be found using the same formula.

b. (2 marks) According to a 2001 paper, “it takes over a year before monetary policy actions have their peak effect on inflation”. That is, there is a lag between the moment that the money supply is increased, and the moment where the economy experiences inflation. In 1972, Milton Friedman calculated this lag was about 2 years for M2 in the US.

Looking at the graph you made for 2.a., is there any evidence of a 1-year or 2-year lag between changes in M2 and inflation? Explain briefly. (Hint: If you plotted the whole period 1914 – 1967, your answer may be different before and after World War II, which ended in 1945. Your graph should show you that a lot of relationships changed during that war. If you’re still not sure how to think about lags, this page may be helpful – it walks you through a step-by-step exercise using M1 in the US.)

c. (4 marks) In lectures, we learned that the role of money as a tool for transactions was extremely important in Canada’s economic history. In this question, we’ll take a closer look at that by calculating the velocity of money – how many times a year the average dollar changed hands. If there are $10 of transactions in one year, in an economy which only has a single dollar coin as currency, that dollar coin must have changed hands 10 times that year.

The quantity theory of money defines velocity, V, as , where M is the money supply, P is the price level and T is the real value of transactions in an economy. All together, PT is the nominal value of transactions in an economy.

For this question, we’ll use M2 as our measure of the money supply, and use nominal Gross National Product (GNP) to stand for the nominal value of transactions.

Calculate and plot Velocity, V, for the period 1926 – 1967 (or 1930 – 1939 if doing it by hand). Your plot should be a line graph with Velocity on the vertical axis and Year on the horizontal axis. Velocity = Nominal GNP / M2 for this plot.

d. (3 marks) Given what you know about the Great Depression, and the graph you created for 2.c., why did the velocity of money change the way it did during the 1930s? Explain your reasoning. (Hint: If you need help with these concepts, the St. Louis Federal Reserve has a good discussion of the velocity of money.)

3. [Research] For this question, we’re going to look at some recent history to allow you to have fun with the Bank of Canada’s interactive statistics. In particular, we’ll be looking at what happened to Canada’s economy during the 2008 – 2009 financial crisis.

To get the data needed for this question, first visit the Bank of Canada’s ‘Indicators’ Statistics page: http://www.bankofcanada.ca/rates/indicators/ . Click on ‘Summary of Key Monetary Policy Variables’. If you’re feeling adventurous, you can try the other links, but the ‘Summary’ allows you to plot years’ worth of data with a click.

Once you’re on the Summary page, you can click the small graph icons below each indicator for a graph of it that covers the relevant time period (2008 – 2010). Clicking on the name of an indicator will take you to an explanation and definition of the same.

a. (8 marks) Pick TWO of the following indicators, and view their graphs from 2008 to 2010: Preferred measures of core inflation, Unit labour costs, Average earnings of permanent workers and Canadian-dollar effective exchange rate index.

What happened to these indicators between 2008 and 2010? Use your knowledge of economics and recent history to provide a possible explanation for what you observed.

b. (6 marks) View the graphs for M2++ (gross) and M1++ (gross) between 2008 and 2009. You should also click on their names for a definition of each.

After viewing the graphs, it should be clear that M2++ and M1++ changed in very different ways between 2008 and 2009. If these are both measures of the money supply, how can this be the case? Explain briefly, and also provide a possible explanation for why each measure of the money supply changed the way it did over the course of 2008 – 2009.

Data for Question 2 (By Hand Data Only – see spreadsheet for full series)

Part a.

Year

M2 ($ millions)

CPI (2002 = 100)

1945

5,207

9.2

1946

5,831

9.4

1947

6,603

10.3

1948

6,863

11.8

1949

7,448

12.2

1950

7,904

12.5

1951

8,139

13.8

1952

8,317

14.2

1953

9,124

14.0

1954

9,240

14.1

1955

10,103

14.1

Part c.

Year

M2 ($ millions)

Nominal GNP ($ millions)

1930

2,183

5,720

1931

2,104

4,693

1932

2,000

3,814

1933

1,941

3,492

1934

1,941

3,969

1935

2,070

4,301

1936

2,205

4,634

1937

2,365

5,241

1938

2,402

5,272

1939

2,526

5,621

Useful References (UVic connection or VPN required for free access)

Question 1

Michael D. Bordo and Angela Redish, “Why did the Bank of Canada Emerge in 1935?,” The Journal of Economic History, Vol. 47, No. 2, 1987, pp. 405 – 417.

Available at http://www.jstor.org/stable/2122238

Muharem Kianieff, “Private Banknotes in Canada from 1867 (and Before) to 1850,” 30 Queen’s Law Journal, Vol. 400, 2004, pp. 400 – 448.

Available at http://heinonline.org/HOL/LandingPage?handle=hein.journals/queen30&div=15&id=&page=

Question 2

Cherie Metcalf et al., “New Estimates of the Canadian Money Stock, 1871 – 1967,” The Canadian Journal of Economics, Vol. 31, 1998, pp. 104 – 124.

Available at http://www.jstor.org/stable/136380

Statistics Canada, “Consumer Price Index, Historical Summary,” Summary Tables.

Available at http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46e-eng.htm

(1914 to 1915 taken from the Bank of Canada’s Inflation Calculator.)

Nicoletta Batini and Edward Nelson, “The Lag from Monetary Policy Actions to Inflation: Friedman Revisited,” External MPC Unit Discussion Paper No. 6, Bank of England, October 2001.

Available via http://econpapers.repec.org/paper/mpcwpaper/06.htm

Tim McMahon, “M1 Money Supply and Inflation,” InflationData.Com, April 9 2009.

Available at http://inflationdata.com/Inflation/Inflation/Money_Supply_and_Inflation.asp

Statistics Canada, “Table F1-13 National income and gross national product, by components, 1926 to 1976,” Historical Statistics of Canada, 1983.

Available at http://www.statcan.gc.ca/pub/11-516-x/sectionf/4057751-eng.htm#1

Yi Wen, “What Does Money Velocity Tell Us about Low Inflation in the U.S.?,” On the Economy, Federal Reserve Bank of St. Louis, September 1 2014.

Available at https://www.stlouisfed.org/On-The-Economy/2014/September/What-Does-Money-Velocity-Tell-Us-about-Low-Inflation-in-the-US

Question 3

Bank of Canada, “Indicators,” Statistics.

Available at http://www.bankofcanada.ca/rates/indicators/

Jean Boivin, “The ‘Great’ Recession in Canada: Perception vs. Reality,” Bank of Canada, March 28 2011.

Available at http://www.bankofcanada.ca/2011/03/great-recession-canada-perception-reality/

Stephen S. Poloz, “The Legacy of the Financial Crisis: What we know, and what we don’t,” Bank of Canada, November 3 2014.

Available at http://www.bankofcanada.ca/2014/11/legacy-financial-crisis/

Various, “The Untold Story of How Canada Survived the Financial Crisis,” The Globe and Mail, September 13 2013 (updated June 19 2015).

Available at http://www.theglobeandmail.com/report-on-business/the-financial-crash/article14257785/