University of SINDH (Jamshoro)

Topic: Quantity Theory Of Money,

Velocity of Money and
Treasury Bill Rate of Pakistan.
Subject: Advance Macroeconomics
Submitted To: Sir Muhammad Akram Gilal
Submitted By: Junaid Ahmed
Class: BS-Part-3 (1st semester)
Roll No: 2k18-Eco-60
Submission Date: 29-08-2020
 QUANTITY THEORY OF MONEY

INTRODUCTION:
Monetary economics is a branch of
economics that studies different theories of money. One of the
primary research areas for this branch of economics is the quantity
theory of money.
According to the quantity theory of money, the
general price level of goods and services is proportional to the money
supply in an economy. While this theory was originally formulated by
Polish mathematician Nicolaus Copernicus in 1517, it was popularized
later by economists Milton Friedman and Anna Schwartz after the
publication of their book, "A Monetary History of the United States,
1867-1960," in 1963.
According to the quantity theory of money, if the
amount of money in an economy doubles, price levels will also double.
This means that the consumer will pay twice as much for the same
amount of goods and services. This increase in price levels will
eventually result in a rising inflation level; inflation is a measure of the
rate of rising prices of goods and services in an economy.

MATHMATICAL PREPRESENTSTION:
It is supported
and calculated by using the Fisher Equation on Quantity Theory of
Money.

M* V= P* T

Where;
M = Money Supply.
V = Velocity Of Money.
P = Price level.
T = volume of the transactions.
VELOCITY OF MONEY:
In economics, the number of times one unit of currency is spent ove
a given period of time. It is indicative of how much economic
activity occurs or is possible at a certain level of money
supply. The income velocity of money tends to rise and fall concurre
ntly with interest rates. It is calculated thus:

Income velocity of money = GDP / money supply (however defined).

GDP (NOMINAL):
Nominal gross domestic product is gross
domestic product (GDP) evaluated at current market prices. GDP is
the monetary value of all the goods and services produced in a
country. Nominal differs from real GDP in that it includes changes in
prices due to inflation, which reflects the rate of price increases in an
economy.

GDP DEFLATOR:
The GDP deflator (implicit price deflator for
GDP) is a measure of the level of prices of all new, domestically
produced, final goods and services in an economy. It is a price index
that measures price inflation or deflation, and is calculated using
nominal GDP and real GDP.

TREASURY BILL RATE:

The rates currently range from
0.09% to 0.17% for T-bills that mature from four weeks to 52 weeks.
“T-bills don't pay periodic interest, instead earning implied interest by
being sold at a discount to face value,” Michelson said. ... The interest
rates of T-bills are determined partly by market demand.
MONEY VELOCITY AND TREASURY BILL
RATE OF PAKISTAN (2000-2020)

YEAR VELOCITY TBR in %

FY2000 3.02 6.8
FY2001 3.03 12.2
FY2002 2.79 5.8
FY2003 2.58 1.6
FY2004 2.49 2.0
FY2005 2.40 7.4
FY2006 2.41 8.3
FY2007 2.27 8.6
FY2008 2.26 11.3
FY2009 2.56 12.9
FY2010 2.57 12.0
FY2011 2.72 13.4
FY2012 2.62 11.9
FY2013 2.52 8.9
FY2014 2.52 9.9
FY2015 2.43 6.8
FY2016 2.26 5.9
FY2017 2.18 5.9
FY2018 2.16 6.7
FY2019 2.13 12.7
FY2020 1.99 6.8
 Chart Title
16
14
12
10
8
6
4
2
0
FY2000
FY2001
FY2002
FY2003
FY2004
FY2005
FY2006
FY2007
FY2008
FY2009
FY2010
FY2011
FY2012
FY2013
FY2014
FY2015
FY2016
FY2017
FY2018
FY2019
FY2020
VELOCITY TBR in %

REASONS OF INCREASE OR DECREASE IN

TREASURY RATE BILL AND VELOCITY OF
MONEY IN PAKISTAN:
Following a military coup in
October 1999, Pervez Musharraf became the President of Pakistan in
2001 and worked to address the challenges of "heavy external and
domestic indebtedness; high fiscal deficit and low revenue generation
capacity; rising poverty and unemployment; and a weak balance of
payments with stagnant exports.” At this time, the country lacked the
foreign exchange reserves needed to cover its imports or service its
debts, remittances and investments had decreased by millions, and
Pakistan had no access to private capital markets.

Yet, sound structural

policies coupled with improved economic management accelerated
growth between 2002 and 2007. Approximately 11.8 million new jobs
were created during Musharraf's term from 1999 to 2008, while
primary school enrollment rose and the debt-to-GDP ratio dropped
from 100 percent to 55 percent. Pakistan's reserves increased from
US$1.2 billion in October 1999 to US$10.7 billion on 30 June 2004. The
rate of inflation fell, while the investment rate grew to 23 percent of
GDP, and an estimated $14 billion of foreign private capital inflows
financed many sectors of the economy. The exchange rate also
remained fairly stable throughout this period. All revenue collection
targets were met on time and allocation for development was
increased by about 40 percent.[34] These gains can be attributed
largely to debt reduction and economic reforms, but also to the
procurement of billions of dollars' worth of U.S. aid to Pakistan in
return for Pakistan's support in the US-led war on terror.

After Musharraf's
resignation in 2008 due to mounting legal and public pressures, the
PPP government once again resumed control of Pakistan. The
administrations of Asif Ali Zardari and Syed Yousaf Raza
Gillani oversaw a dramatic rise in violence, corruption, and
unsustainable economic policies that forced Pakistan to re-enter an
"era of stagflation." The Pakistan economy slowed down to around
4.09 percent, as opposed to the 8.96 to 9.0 percent rate under
Musharraf and Shaukat Aziz in 2004–08, while the yearly growth rate
fell from a long-term average of 5.0 percent to around 2.0
percent.[36] In its calculations, the Pakistan Institute of Development
Economics pointed out that the "nation's currency in circulation as a
percentage of total deposits is 31 percent, which is very high
compared to India," and its tight monetary policy has been unable to
tame inflation, and only slowed down economic growth because
the private sector is no longer playing a key role. Analyzing the
stagflation problem, the PIDE observed that a major cause of the
continuous era of stagflation in Pakistan was a lack of coordination
between fiscal and monetary authorities.

In 2013, Nawaz Sharif

returned to inherit an economy crippled by energy
shortages, hyperinflation, mild economic growth, high debt, and a
large budget deficit. Shortly after taking office, Pakistan "embarked on
a $6.3 billion IMF Extended Fund Facility, which focused on reducing
energy shortages, stabilizing public finances, increasing revenue
collection, and improving its balance of payments position." Lower oil
prices, better security, higher remittances, and consumer spending
spurred growth toward a seven-year high of 4.3 percent in the fiscal
year 2014-15 and foreign reserves increased to US$10 billion. In May
2014, the IMF confirmed that inflation had dropped to 13 percent in
2014 compared to 25 percent in 2008,[45] prompting Standard &
Poor's and Moody's Corporation to change Pakistan's ranking to a
stable outlook on their long-term ratings.

The IMF loan program

concluded in September 2016. Although Pakistan missed several
structural reform criteria, it restored macroeconomic stability,
improved its credit rating, and boosted growth. The Pakistani rupee
has remained relatively stable against the US dollar since 2015, though
it declined about 10 percent between November 2017 and March
2018. Balance of payments concerns have also reemerged as a result
of a significant increase in imports and weak export and remittance
growth. In its South Asian Growth report, the World Bank stated: "In
Pakistan, gradual recovery to around 4.5 per cent growth by 2016 is
aided by low inflation and fiscal consolidation. Increases in
remittances and stable agricultural performance contribute to this
outcome. But further acceleration requires tackling pervasive power
cuts, a cumbersome business environment, and low access to
finance." In his 2016 book, The Rise and Fall of Nations, Ruchir
Sharma opined that Pakistan's economy is in its 'take-off' stage and
termed the future outlook for 2020 ‘very good,’ predicting that
Pakistan would transform from a "low-income to a middle-income
country during the next five years."

In 2016, articles by Forbes and Reuters declared

Pakistan's economy to be on track to becoming an emerging market
in Asia, and affirmed that Pakistan's expanding middle class is key to
the country's economic prospects. On 7 November 2016, Bloomberg
News also claimed that "Pakistan is on the verge of an investment-led
growth cycle." On 10 January 2017, The Economist forecasted
Pakistan's GDP to grow at 5.3 percent in 2017, making it the fifth
fastest growing economy in the world and the fastest growing in
the Muslim world.
 The Internet was in style. Entrepreneurs saw
potential in online business. However, online business was really in its
infancy. Everyone was talking about a "new economy" which referred
to an Internet-driven economy. Most of the dot.com stocks, like
Yahoo.com, were listed on the NASDAQ. In January 2000, the NASDAQ
closed above 5000. The NASDAQ was trading around 2100 ten years
later.
Investors were getting rich off unprofitable stocks with high
prices and higher price/earnings ratios — firms like software
companies and all things computer and Internet. Cisco Systems, for
example, traded at more than 150 times earnings in March of 2000.
In April 2000, an inflation report caused the speculative bubble to
burst and there were huge investment losses.
The 9/11 terrorist
attacks were the events that helped shape other financial events of
the decade. After that terrible day in September 2001, our economic
climate was never to be the same again. It was only the third time in
history that the New York Stock Exchange was shut down for a period
of time. In this case, it was closed from September 10 - 17. Besides the
tragic human loss of that day, the economic loss cannot even be
estimated.
Some estimate that there was over $60 billion in insurance
losses alone. Approximately 18,000 small businesses were either
displaced or destroyed in Lower Manhattan after the Twin Towers fell.
The Department of Homeland Security was created. 9/11 caused a
catastrophic financial loss for the U.S.
Enron, one of the top energy
companies at this time, and Arthur Andersen, one of the top five
public accounting firms, were caught in a corporate fraud scandal that
led to the bankruptcy of Enron and dissolution of Arthur Andersen.
Enron
hid billions of dollars of debt from its shareholders in failed deals and
projects. Further, it pressured its auditors, Arthur Andersen, to ignore
the issues. Shareholders lost more than $60 billion.
 This led to the
passage of the Sarbanes-Oxley Act of 2002 which expanded penalties
for accounting fraud and instructed accounting firms to remain
independent of their clients. Other firms such as Tyco and Worldcom
experienced similar scandals. These scandals shook the securities
markets and investor confidence.
After a brief slide post 9/11, the
stock market rallied but began to slide again in March 2002. The
market reached lows not seen since 1997 and 1998 by July and
September of 2002. The corporate fraud scandals, such as Enron,
along with 9/11, were contributors to this loss of investor confidence
in the stock market.
After the 9/11 terrorist attacks, the War on Terror
was launched in Afghanistan and the Iraq War was launched in 2003.
The cost of these wars is ongoing. To date, the Congressional Research
Service has approved about $944 billion for the operations overseas.
This has been an incredible financial drain on our economy and it is
impossible to know what the final cost will be.
The rise of China and
India as world financial powers is nothing short of amazing.
Economists estimate that both nations can grow at the rate of 7-8%
for decades to come. China, alone, has grown at about 9.6% for the
past two decades. Together, the two countries account for one-third
of the world's population.
Countries like the United States initially
started outsourcing work to China and India because of cheap labor.
This is no longer the case. They kept their work in the two countries
because they found talent. Talent for innovation in high-tech fields. A
million scientists and engineers are trained in India and China each
year compared to a much lower number in the U.S. The balance of
power in technologies is likely to move West to East.
In September of
2008, a seemingly perfect storm of factors came together to precipate
the deepest economic downturn in not only the U.S. but across the
globe, since the Great Depression. The great investment banks that
had stood on Wall Street began to collapse due to the sub-prime
mortgage crisis and serious corporate fraud. During the last months of
the Bush Administration, the federal government stepped in to bail
out some of these institutions in order to keep the U.S. financial
system afloat.
By the time the Obama Administration reached the
White House in January of 2009, the economy had contracted and the
recession had taken hold. At the end of 2009, there are signs of
recovery, but it may be long, slow, and painful.
REFERENCES:
1) www.investopedia.com
2) www.thebalancesmb.com
3) en.wikipedia.org
4) www.futuretimeline.net
5) www.brookings.edu
6) www.visualcapitalist.com
7) www.sbp.org.pk
8) www.pbs.gov.pk
9) economictimes.indiatimes.com
10) corporatefinanceinstitute.com
11) www.sciencedirect.com
12) www.britannica.com
13) www.adb.org
14) https://www.worldbank.org/
15) www.imf.org