Balkh University

Economic Faculty
MFA-06

Assignment Report
October, 2023

Prepared By:

Lutfrahman Rahmani, Ahmad Nawid Farahmand, Habibrahman Rahmani Sayed Ahmad Khalid Akrami and
Mohammad Bashir Azizi

With direct advice of: Mohammad Hakim Sahebzada (MFA general director)
Assignment Report MFA-06

Table of contents

No Title Page

1 Short info 3
2 Summary 3
3 Objective 3
4 Methodology 3
5 Activity 4
6 Main Data 5
7 Challenges 13
8 Recommendations 13
9 Conclusions 13
10 Annexes 14
11 Sources 17

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1. Short info of the report

Class Code: MFA-06

Report title: Assignment 04 and 09
Semester: 1st
Subject Macro-Economic
Reporting Month Oct - 2023

Implemented by: 3th team members

Report date: 10/02/2023

Report compiled by: Lutfrahman Rahmani and team members

2. Summary of the assignment

The two arms of macroeconomic policy are monetary and fiscal policy. Fiscal policy encompasses the
government’s decisions about spending and taxation, as we saw in the previous chapter. Monetary policy
refers to decisions about the nation’s system of coin, currency, and banking. Fiscal pol- icy is usually made
by elected representatives, such as the U.S. Congress, British Parliament, or Japanese Diet. Monetary
policy is made by central banks, which are typically set up by elected representatives but allowed to
operate independently. Examples include the U.S. Federal Reserve, the Bank of England, and the Bank of
Japan. Will Rogers was exaggerating when he said that central banking was one of the three greatest
inventions of all time, but he was right in implying that these policymaking institutions have a great
influence over the lives and livelihoods of citizens of all nations around the world.

Economic fluctuations present a recurring problem for economists and policy- makers. although the
economy experiences long-run growth that averages about 3.5 percent per year, this growth is not at all
steady. Recessions—periods of falling incomes and rising unemployment—are frequent. In the recession
of 1990, for instance, real GDP fell 2.2 percent from its peak to its trough, and the unemployment rate
rose to 7.7 percent. During reces- sions, not only are more people unemployed, but those who are
employed have shorter workweeks, as more workers have to accept part-time jobs and fewer workers
have the opportunity to work overtime.When recessions end and the economy enters a boom, these
effects work in reverse: incomes rise, unemploy- ment falls, and workweeks expand.

3. Objectives

This Report introduction to the monetary system provides the founda- tion for understanding
monetary policy. In the next part, consistent with the long-run focus of this report, we examine the long-
run effects of monetary policy.The short-run effects of monetary policy are more complex. We start
discussing that topic in Chapter 9 also and there we will discuss about fluctuation too. This report gets us

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ready Both the long- run and short-run analysis of monetary policy must be grounded in a firm
understanding of what money is, how banks affect it, and how central banks control it.

4. Methodology
The methodology used for this report is included these parts in the below table:

Methodology Mark
Observation ☐
group discussion ☒
Extracting data from the related book ☒
Browsing in web ☒
Statistical analysis ☒
Case studies ☒
Research ☐

5. Activities during the assignment

S# Planned activity brief

5.1 Team Building - According to the plan for presenting the chapter 4 and
9 we collaborate with each other to build a team of six
members from different levels.
- After the team built all members committed to do their
best for this assignment
5.2 Assigning activities - By considering the level of knowledge of the members
the chapters distributed among the members
- In this section all agreed to take part in presenting the
assignment and prepared for a part of the chapters 4
and 9
5.3 Meetings and discussions - For a better performance the team members assigned
a particular time to discuss about the assignment and
the kind of presenting
- For a better coordination we made an online webinar
in Zoom meeting to discuss more about the titles
included in presentation
5.4 Presenting in the class - The first activity in this section is making a plan to set
the time and date of presenting the assignment that
we have made a plan and is included in the annex of
this report
- The presentation presented in the class with success

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6. Main Data

6.1. Questions related to Chp4 and Chp9

1) Suppose that in Korea the velocity of money is constant, real GDP grows by 6% per year each year, the
money stock grows by 9% per year, and the nominal interest rate is 7%.

a) Using the quantity theory of money and the Fisher relation, what should be the inflation rate and the
real interest rate in Korea?

b) Suppose the central bank of Korea decides to lower inflation by lowering the money supply growth
rate to 8% (all else constant). Now what would be the equilibrium values of inflation and the real interest
rate?

Answer 1:

a) According to the quantity theory of money, MV = PY, where M is the money stock, V is the velocity of
money, P is the price level, and Y is real GDP. Since V is constant, we can assume that it cancels out on
both sides of the equation. Therefore, we can rearrange the equation to solve for the price level:

Next, we can use the equation of exchange to calculate the growth rate of nominal GDP:

%ΔM + %ΔV = %ΔP + %ΔY

Since V is constant, we can simplify the equation to:

%ΔM = %ΔP + %ΔY

Plugging in the given values, we get:

9% = %ΔP + 6%

note: According to Fisher’s theory (1:1) any Δ in P causes same Δ in p so ΔP=Δp Solving for %ΔP, we get:

%ΔP = 3% Δp=3%

Using the Fisher relation r= i-p so r=7%-3% = 4%

b) If the central bank of Korea lowers the money supply growth rate to 8%, then we can use the same
equations as in part a) to calculate the new equilibrium values of inflation and the real interest rate.

8% = %ΔP + 6% %ΔP = 2% or Δp=2%

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as r= i-pso real interest rate = 7% - 2% = 5%

2) Suppose you are advising a small country (Zimbabwe) on whether to print its own money or
to use the money of its larger neighbor (South Africa). In a few sentences, what do you think are
likely to be the costs and benefits of a national money, reasoning from the theory in chapter 4?
(Hint: be sure to consider the role of seigniorage.) Does the relative political stability of the two
countries have a role in this decision?

Answer 2:

The costs and benefits of a national money for Zimbabwe depend on several factors. On the one
hand, printing its own money would give Zimbabwe more control over its monetary policy and
allow it to potentially generate seigniorage revenue from the difference between the cost of
producing money and its face value. On the other hand, if Zimbabwe's economy is not strong
enough to support its own currency, it could lead to inflation and a loss of confidence in the
currency, making it more difficult to conduct international trade. Using South Africa's currency
could provide more stability and credibility, but would also mean giving up some control over
monetary policy.

The relative political stability of the two countries could play a role in this decision. If Zimbabwe
is facing political instability or high levels of corruption, it may be more difficult to establish
credibility for its own currency. In contrast, if South Africa has a more stable political
environment, using its currency could provide more stability for Zimbabwe's economy.
Ultimately, the decision should be based on a careful analysis of the costs and benefits, taking
into account the specific circumstances of Zimbabwe's economy and political situation.

3) Suppose the real side of an economy is characterized by:

Y = 80K1/2 L1/2
G =3000
I =2000-6000r K=100 and L= 100 T=3000 C=600+.6(Y-T)

And suppose the nominal side of this economy is characterized by:

Real money demand: (M/P)d = 0.2Y - 1000r Nominal money supply: Ms = 3000

Where P is aggregate price level, and M is nominal stock of money.

a) Compute the following: Real GDP (Y), real interest rate (r ), real wage rate (W/P, in units of goods),
aggregate price level (P), and a nominal wage rate (W, in terms of money).

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b) Suppose that the government raises the money supply 10% from 3000 to Ms =3300. Report the new
values for each of the variables in part (a) above. Does the Classical Dichotomy hold in this economy?
Explain.

Answer

a) Real GDP (Y):

Y = 80K1/2 L1/2

Y = 80(100)1/2 (100)1/2 Y=8000

Real interest rate (r):

Y=C+I+G 8000 = 600+.6(Y-T) +2000-6000r + 3000 r=0.1 or 10%

Real wage rate (W/P):

(W/P) = (Y/2L) W/P = (8000/2*100) w/p=40

W/P = 40

Aggregate price level (P):

Money market equilibrium condition (M/P) d = Ms/p

(M/P) d =0.2Y - 1000r = Ms/p=3000

0.2(8000) – 1000r=3000/p as r=0.1 so 3000/p=1500 p=2unit/good

Nominal wage rate (W):

W/P *p= 40*2=80

b) New values:

if Ms=3300 so

Equilibrium 0.2(8000) – 1000r=3300/p as r=0.1 so 3300/p=1500 p=2.2unit/good

Nominal Wage W/P *p= 40*2.2=88 unit of money

The Classical Dichotomy holds in this economy because the change in the nominal money supply did not
affect any of the real variables (Y, r, W/P). The only variable that changed was the aggregate price level
(P), which is a nominal variable.

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4) Economic Fluctuations: A significant scare a decade ago related to the change of the
millennium, “Y2K.” One worry the Federal Reserve had was that bank computers and ATMs might
malfunction on January 1 of the new century. Analyze this situation in terms of aggregate demand
and aggregate supply curves from chapter 9 (based on the quantity theory of demand where
price is fixed in the short run but flexible in the long run). Regard this as a fall in money velocity
that is temporary, just affecting the short run but returning to normal in the long run.

a) Which should the Federal Reserve have worried about: a possible recession or excessive
inflation? Explain.

b) Discuss what monetary policy actions you would suggest to prevent any such problems. (Be
specific about what you would do in the short run and in the long run.)

Answer:

a) The Federal Reserve should have been more worried about a possible recession than excessive
inflation. The Y2K scare could have caused a temporary fall in money velocity, which would have
decreased aggregate demand in the short run. If the Federal Reserve had not taken any action,
this could have led to a recession in the short run. On the other hand, there was no reason to
expect excessive inflation as a result of the Y2K scare, since the quantity theory of money
suggests that inflation is driven by changes in the money supply in the long run, not changes in
money velocity.

In short: the temporary fall in velocity lowers demand in the economy (a leftward shift in AD
curve in the short run). This would lower output and generate a recession. Since this price is fixed,
inflation is not a problem in the short run.

MV=PY so a fall in velocity would lower output for a given price level and money supply

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Since the shock to velocity is temporary, demand will return to normal on its own in the long run.
(AD shafts right in the long run back to its initial position. So there is no effect on output and no
inflation in the long run.

b) To prevent any problems from the Y2K scare, the Federal Reserve could have implemented
expansionary monetary policy in the short run. This would involve increasing the money supply
to offset the temporary fall in money velocity and maintain aggregate demand. The Federal
Reserve could have done this by decreasing the reserve requirement for banks, lowering the
federal funds rate, or engaging in open market operations to purchase government bonds.

In the long run, the Federal Reserve would need to reverse these expansionary policies to prevent
excessive inflation. They could do this by increasing the reserve requirement for banks, raising
the federal funds rate, or engaging in open market operations to sell government bonds. These
actions would decrease the money supply and prevent inflation from occurring in the long run.

Overall, the key to preventing any problems from the Y2K scare would be for the Federal Reserve
to carefully manage monetary policy to ensure that aggregate demand remained stable in the
short run, while also preventing excessive inflation in the long run.

In short: To counteract the short run effect of the shock the federal reserve should increase the
money supply in the short run. This would shift the AD to the right returning it to its initial
position. But it should reverse this policy in the long run. Otherwise, when the velocity returns to
normal in the long run the extra money supply would generate inflation. The (AD curve would be
to the right of its initial position before the velocity shock)

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6.2. Statistical analysis

Descriptive Statistics
Mean Std. Deviation N
Oprice 21.2800 26.52031 5
inflation 7.7200 2.24433 5

Correlations
Oprice inflation
Pearson Correlation Oprice 1.000 .891
inflation .891 1.000
Sig. (1-tailed) Oprice . .021
inflation .021 .
N Oprice 5 5
inflation 5 5

Variables Entered/Removeda
Variables Variables
Model Entered Removed Method
b
1 inflation . Enter
a. Dependent Variable: Oprice
b. All requested variables entered.

Model Summaryb
Change Statistics
Adjusted R Std. Error of R Square Sig. F
Model R R Square Square the Estimate Change F Change df1 df2 Change
a
1 .891 .794 .726 13.88985 .794 11.582 1 3 .042
a. Predictors: (Constant), inflation
b. Dependent Variable: Oprice

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ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 2234.525 1 2234.525 11.582 .042b
Residual 578.783 3 192.928
Total 2813.308 4
a. Dependent Variable: Oprice
b. Predictors: (Constant), inflation

Coefficientsa

Standar
dized 95.0%
Unstandardized Coeffici Confidence
Coefficients ents Interval for B Correlations Collinearity Statistics
Uppe Zer
r o-
Std. Lower Boun ord Part
Model B Error Beta t Sig. Bound d er ial Part Tolerance VIF
1 (Const -60.021 24.68 - .093 - 18.53
ant) 3 2.43 138.57 3
2 4
inflatio 10.531 3.094 .891 3.40 .042 .683 20.37 .89 .89 .891 1.000 1.000
n 3 9 1 1
a. Dependent Variable: Oprice

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7. Challenges
1. Lack of time to be prepared
2. Difference of knowledge level
3. Weak prepare of team members in some topics
Major 4. Nonexistence of rich resources in Persian language
5. Week coordination
challenges
6. Less experience in research
7. Lack of assistance in research fields or academic activities
8. Lack of class participance in presentations

8. Recommendations
The following recommendation is for better performances of future assigners and researchers

a. Create the team carefully and make sure all the members are relax to work with each other.
b. Assign the chapters for at most two or three people to present
c. Make sure that all presenters have good coordination
d. Try to use some creative ideas in presentation and report
9. Conclusions

1. To prevent any problems from the Y2K scare, the Federal

Reserve could have implemented expansionary monetary
policy in the short run.
2. This would involve increasing the money supply to offset the
temporary fall in money velocity and maintain aggregate
demand.
3. The Federal Reserve could have done this by decreasing the
reserve requirement for banks, lowering the federal funds
rate, or engaging in open market operations to purchase
government bonds.
4. In the long run, the Federal Reserve would need to reverse
Short results these expansionary policies to prevent excessive inflation.
5. They could do this by increasing the reserve requirement for
banks, raising the federal funds rate, or engaging in open
market operations to sell government bonds.
6. These actions would decrease the money supply and prevent
inflation from occurring in the long run.
7. Overall, the key to preventing any problems from the Y2K
scare would be for the Federal Reserve to carefully manage
monetary policy to ensure that aggregate demand remained
stable in the short run, while also preventing excessive
inflation in the long run.

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10. Annexes
10.1. Presentation plan
This plan is made for better coordination and management of time

No Title Time Responsible Remarks

From To person
rd
Tuesday 3 October
1 - What is Money 4:10 4:40 Nawid 4th Chapter
- . PM PM Farahmand
- Social Cost of inflation
2 - What economists say 4:40 5:00 Bashir Azizi 4th Chapter
about inflation PM PM
- ......
- Causes of hyper
inflation
Break for Namaz from 5:00 PM to 5:10 PM
3 - Case study 5:10 6:00 Lutfrahman 4th Chapter
- Summarize and PM PM Rahmani
compute
Wednesday 4th October
4 - Economic Fluctuation 4:10 4:40 Habib Rahman 9th Chapter,
- ..... PM PM Rahmani
- Aggregate demand
curve
5 - Aggregate supply 4:40 5:00 Khalid Akrami 9th Chapter,
- ..... PM PM
- Shocks against
aggregate supply
Break for Namaz from 5:00 PM to 5:10 PM
6 - Case study 5:10 6:00 Lutfrahman 9th Chapter,
- Summarize and PM PM Rahmani Assignment
compute
- Assignment

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10.2. Photos

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11. Sources:
- Chapter 4 and Chapter 9 (Macroeconomic by Gregorio Mankew)
- Case studies
- Macro-Economic by Timor Rahmani
- Assignment questions
- Websites

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