Econ 330 Homework

ECON330
Problem Set Nr.1
Salaru Doina
UID: 115818033

1. Data Exercise

1. Monetary base: the sum of the Federal Reserve’s and the US Treasury’s monetary liabilities, which includes currency in circulation and reserves.

1. Size of monetary base in 2005: 775,222 Million Dollars
2. Size of monetary base in 2008/2009: 1,683,704 Million Dollars
3. Size of monetary base in 2017 (December): 3,850,969 Million Dollars

1. M1 Money Stock: This includes the most liquid assets – currency, checking account deposits and traveler’s checks.
2. During the period 2005-2018, we can see that the monetary base and the M1 money stock are somewhat proportional in their changes. Between 2005 and 2008, both indicators were stable, without fluctuations and the monetary base was lower than the M1 money stock. During the 2008/2009 recession, both the money stock and the monetary base starting growing, with the monetary base reaching a level higher than the money stock and having a much more considerable increase. Since the 2009 financial crisis, both indicators have been increasing in unison, with the M1 money stock remaining lower than the monetary base, which also shows more fluctuations than the money stock. (See Figure 1 below)
3. Money Multiplier: Shows us how much the money supply changes for a given change in the monetary base.

From the graph, we can see that after the financial crisis, fluctuations in the monetary base were more substantial, whereas the M1 money stock had a stable, continuous growth with no oscillations. Thus, the money multiplier has been below 1, meaning that for every increase in the monetary base, there has been a smaller increase in the money stock. Between 2005 and 2008, the money multiplier was above 1.

[pic 1]

Figure 1: M1 Money Stock and Monetary Base 2005-2018

1. Research Exercise
   

1. Nominal interest rate: an interest rate which does not take inflation into account
   Real interest rate: the interest rate that is adjusted by subtracting expected inflation (or changes in the price level)
2. Current nominal interest rate on 2-year government bonds in:

1. Sweden -0.305 %
2. Switzerland -0.829 %
3. Germany -0.540 %
4. Japan -0.127%

1. All of these countries have a negative nominal interest rate on 2-year government bonds. This policy was adopted by their respective central banks in order to raise inflation (price level) and stimulate economic growth.

1. Data Exercise
   

We can see that the interest rates for 10-year Government Bonds in the UK, US and Germany have been more or less moving/fluctuating together since 1990. From the graph, it can be seen that Germany has been the only one so far to have negative interest rates on long term Government bonds (-0,15 in 2016). The interest rates in the UK are somewhat higher than the ones in the US and Germany has the lowest interest rates of the 3 countries for most of the time.

[pic 2]