ECOS3010: Assignment 2 (Total: 20 marks) Due 11:59 pm, Friday, May 23

(Week 12), 2025 1. This assignment 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. This assignment is worth 10% of total

weight. 2. TYPE your work including all mathematical equations. The

assignment must be submitted as a typed PDF file, with no exceptions. Untyped

work will not be graded and will receive a mark of zero. If any question requires a

graph, you are encouraged to use any software to create the graph and include it

as a figure in the PDF. if you encountrer specific difficulties using software, you can

draw the graph by hand, but it must be clearly presented. Do not forget to include your

name and SID. 3. Ensure that working process is clearly articulated, demonstrating your under- standing and methodology. Detailed and logical presentation of the process is crucial

and helpful for solving the problem and earning full credit. 1 PROBLEM 1. (10 Marks) Economists measure the velocity of money as P Y/M , where P

represents the general price level, Y is real output, so that PY

denotes nominal output (i.e., nominal GDP) and M represents the nominal

money supply. The ratio P Y/M indicates the frequency at which a unit of money is

used to purchase final goods and services included in nominal GDP. For this

problem, we explore how the velocity of money has changed in Australia over recent

decades, from March 2004 to December 2024 using money supply measured by

Broad Money. We then use the empirical findings to examine if the quantity

theory of money holds in Australia. Please submit your data (keeping three

decimal places) as an appendix at the end of the PDF to your assignment. (a) Exploit data from Australian Bureau of Statistics to find nominal output

P Y . In particular, you can use data series 5206.0 (Table 3, Column CG, Series

ID:A2304418T) to find quarterly Gross Domestic Product (P Y ). [2 marks] (b) From the Statistics Tables of the Reserve Bank of Australia, find money supply (see

Monetary Aggregates) M measured by Broad Money

(Table D3, Column M, Series

ID:DMABMS). Please convert the monthly data into quarterly data by keeping the values of

money supply for March, June, September and December in each year. [2 marks] (c) Calculate the velocity of money P Y/M. Plot the time series for the velocity in a single

chart. Note that output is measured in millions of dollars and money supply is measured in

billions of dollars. Use both series in same units (billions) for consistency. Use time quarters

as the x-axis and velocity of money as the y-axis in your time series plot. [2 marks] (d) From your plot in part (c), how do velocity of money change over time? Can you offer an explanation to rationalise your findings? Explain. [2 marks] (e) What does the quantity theory of money suggest? Do the empirical findings

you obtain from part (c) and part (d) support the quantity theory of money in

Australia? Explain [2 marks] 2 PROBLEM 2. (10 Marks) Consider the OLG model in Problem 1 of Assign- ment 1. Suppose that the United States (country 1) and Malaysia (country 2) have

foreign currency controls in effect. The demand for money is growing at   1n1 percent in the United States and at   2n2 percent in Malaysia (net rates) each period. The money

supplies in the United States and Malaysia are growing at z1 and z2 percent (net rates)

in each period, respectively. (a) Define the exchange rate (et) as in our lectures. What are the units in which the exchange rate is measured: U.S. dollars per Malysian Ringgit or Malaysian

Ringgit per U.S. dollar? [1 mark] (b) Using the database developed by the World Bank (World Development Indi- cators Link), find the data for two countries over the past decades to determine the

values for    and n. What is the rate of return on money in the U.S.? In Malaysia?[Hint:

Use the data from 2005 to 2023. For simplicity, employ the arithmetic mean for GDP

growth (annual %), population growth (annual %) and broad money growth (annual %), and round the final result to four decimal points.) [2 marks] (c) In a system of flexible exchange rates, what i s the t ime path of the exchange

rate between the U.S. and Malaysia (et+1/et) from our model? Review the

exchange rate data using the Malaysian Ringgit to U.S. Dollar Spot Exchange Rate. (Use the 'Edit Graph   function in the provided link to correctly select the annual

end-of-period data. Ensure that you choose the appropriate time frame to align

with our model. Additionally, normalize the values to 100 as of the date

2005-01-01.) Based on this real-world data, do you believe the theoretical model

aligns with the observed trends? Provide a brief explanation to support your

assessment. [3 marks] (d) On July 6, 2023, Bank Negara Malaysia (BNM) raised the overnight policy rate

to 3%, ending a period of accommodating monetary policy used during the pandemic.

This tightening was aimed at curbing inflation and stabilising the exchange rate. Given this change, and holding all other factors constant, which variable in our

economic model for Malaysia has been impacted? Should the value of this

variable be expected to increase or decrease relative to its previous level? [2 mark] (e) How does above changing factor affect t he t ime p ath o f t he e xchange r ate in

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