Name : MICHAEL P.

AQUINO Score: ____

Section : ___________________
Subject : AE 212 & 412 – Economic Development
Class Schedule : MWF (6:00 pm –7:00 pm)&(7:00 pm-8:00pm)
Teacher : Bernadette B. Aves, MBA
Date : April 1, 2020 (Wednesday)

MODULE 5
Learning Activity Sheet # 5

Lesson / Topic : Part 1 – Money, Growth & Inflation

Learning Target(s) :
 To read and understand clearly the Quantity Theory of Money
 To watch the youtube videos about the explanation of the topic
 To answer questions related to the topic

Reference(s) : The Principles of Economics, 7th edition by Gregory Mankiw

https://www.youtube.com/watch?v=q59tZKP0HME
https://www.youtube.com/watch?v=SP37en1KWiI

Exercises / Questions:

INSTRUCTIONS:

01. Read and understand pages 633-637 of the pdf of the textbook. Watch also the youtube
videos specified above so that you could understand better the topic for this module.

02. Answer the following questions and submit it thru messenger not later than
5 pm today, April 1, 2020.

a. Explain how an increase in the price level affects the real value of money.

The fundamental relationship between the price level and the value of money is
that, when price level goes up, the value of money goes down or vice versa. The
relationship can simply be explained by the daily transactions that we are involved in
for our survival.

We perceive the money is valuable only because it has tangible value in relation
to what a person can buy with it. When the price level increases, it deteriorates
purchasing power of the currency circulating in the economy.

Since the increasing price level leads to decrease in purchasing power,

accordingly, money becomes less valuable with the higher price level. Thus, an increase
in the price level reduces the real value of money because each dollar in your wallet
now buys a smaller quantity of goods and services.

b. According to the quantity theory of money, what is the effect of an increase in

the quantity of money?

According to the quantity theory of money, an increase in the quantity of money

causes a proportional increase in the price level.

c. Wages and prices are many times higher today than they were 30 years ago,
yet people do not work a lot more hours or buy fewer goods. How can this be?

Inflation has raised the general price level. An increase in the general price level
has no effect on real variables in the long run. Wages are higher, but so are prices.
Prices are higher, but so are wages and incomes. In the long run, people change their
behavior in response to changes in real variables, not nominal ones.
d. Define each of the symbols and explain the meaning of M V=P Y.

MV = PY M = money supply,
V = velocity of money,
P = price level,
Y = real GDP

Assumptions:
 According to monetarist theory, money supply is the most important determinant
of the rate of economic growth.
 It is governed by the MV = PQ formula, in which M = Money supply, V = Velocity
of money, P = Price of goods, and Q = Quantity of goods and services.
 The federal reserve controls money in the United States and uses three main
levers—reserve ratio, discount rate, and open market operations—to increase or
decrease money supply in the economy.
 V is constant
 Money has no effect on real variables (so ∆M has no effect on Y)
 Y is entirely determined by the fixed stock of labor, capital and technology

Monetarist theory is governed by a simple formula, MV = PQ, where M is the

money supply, V is the velocity (number of times per year the average dollar is spent),
P is the price of goods and services and Q is the quantity of goods and services.
Assuming constant V, when M is increased, either P, Q, or both P and Q rise. General
Price levels tend to rise more than the production of goods and services when the
economy is closer to full employment.

e. Research about the inflation rate of the countries assigned to your group in
Assignment #3. Give also the factors that contribute to such inflation rate.

South Africa

The annual inflation rate in South Africa increased to 4.6 percent in February
2020 from 4.5 percent in January and above market expectations of 4.5 percent. It was
the highest inflation rate since November 2018, as cost of food & non-alcoholic
beverages rose the most in over 2 years (4.2 percent vs 3.7 percent in January), of
which fruit (6.6 percent) and fish (6.3 percent). Also, prices advanced further for
miscellaneous goods & services (6.3 percent vs 5.7 percent); clothing & footwear (2.3
percent vs 2.2 percent) and health (5.5 percent vs 5 percent). Meantime, inflation was
steady for housing & utilities (at 4.7 percent). In contrast, cost slowed for transport
(6.2 percent vs 6.4 percent); alcoholic beverages & tobacco (4.9 percent vs 5.2
percent); household contents & services (2.4 percent vs 2.7 percent) and restaurants &
hotels (1.8 percent vs 2.4 percent). On a monthly basis, consumer prices went up 1
percent, the most since February 2017, after rising 0.3 percent in January.

This study investigated the determinants of inflation in South Africa using

quarterly data from 1970Q1 to 2015Q4. The study was motivated by recent trends in
domestic inflation that has frequently been at the upper end of the target range of
between 3% and 6%, and the need to guide inflation-related policy since 2008. These
recent trends raised concerns regarding the effectiveness of the current monetary
policy approach in responding to internal and external factors that are significant in
determining domestic inflation. Using Error Correction Model (ECM) modelling
techniques, empirical results revealed that inflation expectations, labour costs,
government expenditure and import prices are positive determinants, while GDP and
exchange rates are negative determinants of inflation. To achieve the macroeconomic
policy objective of a stable and low inflation rate for South Africa, more emphasis
should be placed on anchoring inflation expectations, which was found to be highly
significant in determining inflation.
Ethiopia

The annual inflation rate in Ethiopia climbed to 21.8 percent in February of 2020
from 18.7 percent in the previous month. This was the highest inflation rate since May
of 2012, as massive crop destruction due to locust invasions is causing food shortages.
On a monthly basis, consumer prices surged 2.9 percent, the most since May of 2019,
after increasing 0.8 percent in the previous month

This study examined the effects of some factors on inflation in Ethiopia by means
of co-integration and error correction methods using yearly data for a period of 40
years. The results of the analysis reveal that in the long run broad money supply and
gross domestic product are contributed in raising consumer price index while consumer
price index is bound to decrease due to higher imports and gross national saving.
Credit facility and exports are found to be insignificant. In the short run, the coefficient
of error correction term is -2.26 suggesting 26 percent annual adjustment towards long
run equilibrium. Broad money supply (M2) has more positive effect on inflation than
GDP and GNS in the short-run. The broad money supply coefficient is 0.60, 6 percent
increase in broad money supply trigger 0.60% increase in inflation. On the other hand
the GDP coefficient is 0.46 and the GNS coefficient is –0.90, implying a one percent
increase in broad money supply trigger 0.46% increase and 0.90% decrease in inflation
respectively. The credit facility, exports and imports are found to be insignificant in the
short-run in explaining inflation in the country. On the basis of the findings of the
study, it can be concluding that inflation in Ethiopia is determined by demand side
factors as well as supply side factors but gross domestic product and money supply are
critical.

Egypt

Egypt's annual consumer price inflation rate declined to 5.3 percent in February
2020, the lowest since November last year, from 7.2 percent in January. Food prices
went down 0.9 percent, following a 2.6 percent increase in the previous month, amid
lower cost of vegetables (-1.1 percent vs 10.3 percent). In addition, inflation slowed a
bit for transport (16.1 percent vs 16.3 percent) and clothing & footwear (3.7 percent vs
4.1 percent). On the other hand, costs rose further for housing & utilities (4.7 percent
vs 4.6 percent); restaurants & hotels (10.6 percent vs 10.3 percent) and furnishings
(2.2 percent vs 1.8 percent). On a monthly basis, consumer prices were unchanged,
after rising 0.7 percent in the previous month.

The rapid rise of inflation following the floating of the pound took many by
surprise for two main reasons. First, it was thought that the “pass-through” from
exchange rates to inflation was relatively small as imports represent less than twenty
percent of gross domestic product (GDP). Second, it was argued that inflation before
the floating pound already reflected the value in the parallel market, which at that time
had reached EGP 17 to the US dollar. So, on both accounts, no major increase in
inflation was expected. In retrospect, it is clear that both these assumptions were false.

Nigeria

The annual inflation rate in Nigeria rose for the sixth straight month to 12.2% in
February of 2020 from 12.1% in the previous month. The rate was the highest since
April of 2018, amid the continued impact of borders closure and also the recent hike in
VAT tax rate to 7.5%. Food inflation increased further to 14.9% from 14.85% in
January, reaching the highest level since March of 2018. Additional upward pressure
came from prices of clothing & footwear (10.14% vs 10.08%); transport (9.43% vs
9.35%); housing & utilities (7.81% vs 7.78%); furnishings (9.39% vs 9.23%);
education (8.93% vs 8.87%); alcoholic beverages, tobacco & Kola (9.85% vs 9.81%);
communication (8.15% vs 8.06%); recreation & culture (8.46% vs 8.30%);
restaurants & hotels (8.66% vs 8.49%) and miscellaneous goods & services (9.45% vs
9.30%). On a monthly basis, consumer prices were up 0.79%, after increasing 0.8% in
the previous month.

This paper aims at identifying major factors that cause inflation in Nigeria. Based
on the autoregressive distributed lag (ARDL) estimation method, the study shows
empirical support for significant impact of external debt, exchange rate, fiscal deficits,
money supply and economic growth on inflation. It further shows previous period or
lagged inflation rate as a significant determinant of current inflation rate. However, the
study produced no evidence of significant longrun impact of interest rate on the rate of
inflation in Nigeria. The study recommends economic reforms that target foreign
exchange inflow through increased export trade, as well as a paradigm shift away from
deficit budgeting. There is also a need for infrastructural and institutional reforms to
eliminate or, at least, minimize the impact of structural inequity on output prices.

Angola

Angola's annual inflation rate soared to 18.74 percent in February of 2020 from
17.95 percent in the prior month. The rate was the highest since September of 2018,
following the recent VAT introduction in October and the continued devaluation of the
Kwanza. On a monthly basis, consumer prices were up 1.72 percent, slowing from a
2.05 percent increase in the previous month, amid a slowdown in costs of education
(3.08 percent vs 32.87 percent) and housing & utilities (0.44 percent vs 1.01 percent).
In contrast, prices rose further mainly for food (2.11 percent vs 1.96 percent);
transport (1.43 percent vs 0.69 percent); hotels, cafes & restaurants (1.74 percent vs
1 percent); recreation & culture (1.87 percent vs 1.75 percent) and alcoholic beverages
& tobacco (1.91 percent vs 1.75 percent).

In recent years, the decline in inflation in Angola has stalled and further steps
may be needed to attain the authorities' medium term goal of meeting the Southern
African Development Community (SADC) convergence criteria of a low single digit
inflation rate. A Vector Error Correction (VEC) model, which analyzes the factors that
affect the inflationary process in Angola, suggests that the inflation path has been
largely affected by exchange rate movements. This implies that greater exchange rate
flexibility that facilitates a gradual appreciation would be instrumental to moderate
price growth through reducing the price of imports and limiting liquidity injection by the
National Bank of Angola (BNA). Additionally, the analysis shows that excess liquidity,
which is measured by positive deviations of M2 from its equilibrium level, adds to
demand pressures, and contributes to inflation with a lag. This underlines the
importance of closely monitoring the growth of monetary aggregates as well as
improving liquidity management.

Morocco

The Consumer Price Index in Morocco decreased 0.20 percent in February of

2020 over the previous month. Several countries in the Middle East and North Africa
(MENA) region are considering or have already begun the process of opening their
domestic markets to international trade and capital flows in order to bolster investment
and, by extension, growth. However, as underscored by recent experience from the
emerging markets of Latin America and South East Asia in the 1990s, large and volatile
capital movements can exert intense macroeconomic pressures and contribute to the
onset and depth of financial crises. At the heart of these crises has been the interplay
between rapid capital flows and fixed exchange rate regimes which became vulnerable
to speculative attacks, as in Mexico in 1996, Asia in 1997 and Russia in 1998 (Mussa et
alii, 2000). Thus, it is reasonable to suggest that unless MENA countries make their
exchange-rate regimes more flexible, they may become susceptible to the negative
consequences arising from their economic and financial liberalization.

Kenya

The annual inflation rate dropped to 6.06 percent in March of 2020 from 6.37
percent in the previous month. The country rebased the year it uses to calculate
inflation to February 2019 from February 2009, in order to better reflect changing
consumer trends. On a monthly basis, consumer prices went up 0.18 percent, down
sharply from 1.80 percent in the prior month, amid lower prices of some food items
such as tomatoes (-6.06 percent) and spinach (-4.87 percent).

Central bank rate and economic growth are the main instruments policy makers
should aim at in controlling the inflation rate. According to the result, central bank rates
and GDP growth rate are significant determinants of inflation rate during the study
period. According to the result, an increase in CBR will lead to an increase in inflation.
Therefore policy makers should adopt policies that cushion an increase in central bank
rates. Interest rate is the major tool used by the central bank to achieve inflation
target. Changes in this interest rate affect various kinds of economic activity and
thereby, over time, inflation. Interest policy is effective in reducing the supply of money
thereby reducing the rate of inflation. Economic growth has a negative impact on the
rate of inflation. This implies that an increase in economic growth reduces the level of
inflation. Therefore policy makers should embrace fiscal policies that spur economic
growth in order to contain an increase in inflation

Uganda

The inflation rate in Uganda was recorded at 3 percent in March of 2020. This
study identifies main factors underlying inflation in Uganda, both in the long - and
short-rung, using monthly data from January 1999 to October 2011. It uses a single-
equation Error Correction Model (ECM) based on the quantity theory of money including
both external and domestic variables. The main finding is that both external and
domestic factors explain dynamics in inflation in Uganda. Over the long-run, monetary
aggregate, world food prices, and domestic supply and demand effects in agricultural
sector are main determinants of inflation in Uganda. While money growth, world food
prices, and energy prices, combined with domestic food prices have short-term impact
on inflation. Finally, the study finds evidence of inflation inertia which can be attributed
to expectations of agents and/or inflation persistence.

Tanzania

The annual inflation rate in Tanzania came in at 3.7 percent in February of 2020,
unchanged from the previous month. Prices slowed mostly for housing & utilities (4.5
percent vs 4.8 percent in January); furnishings (2.2 percent vs 2.5 percent);
restaurants & hotels (2.1 percent vs 2.8 percent) and miscellaneous goods & services
(1.5 percent vs 1.6 percent). Also, cost advanced at the same pace for clothing &
footwear (2.1 percent) and recreation & culture (1.1 percent). On the other hand,
inflation edged higher for transport (2.2 percent vs 1.7 percent) and food & non-
alcoholic beverages (5.9 percent vs 5.7 percent), after locusts invasions have
destroyed a vast extension of crop fields. On a monthly basis, consumer prices inched
up 1.1 percent, after increasing 0.4 percent in the prior month.

This study intended to examine the factors influencing price inflation in the
economy of Tanzania. The research was carried out at the Bank of Tanzania (BOT) and
Ministry of Finance and Economic Affairs (MOFEA) in Tanzania. The study was
conducted with the following objectives: To establish internal factors which influence
inflation in Tanzania, establish external factors which influence inflation and finally
suggest probable measures to curb inflation in Tanzania’s economy. However after a
thorough scrutiny the following factors were established as influencing price inflation in
Tanzania these included rising fuel costs, rising energy prices, rising food prices and
depreciation of the Tanzanian shilling. Data were collected through Questionnaires,
Interviews and Documentary Review. Questionnaires were open-ended questions,
which allowed individuals to express their views concerning the causes of inflation in
Tanzania’s economy. Interviews were conducted on the basis of predetermined
interview guide. Nevertheless there was reluctance of the interviewees giving the data
due to the busy nature of their activities I therefore had to collect hard data from their
businesses and went on to scrutinize on by myself. For this case more of secondary
data was used. After analyzing the data, tests of questionnaires were carried and
presented in tables for easy interpretation. From findings, a researcher has concluded
that the Bank of Tanzania in collaboration with Ministry of Finance and Economic Affairs
have a lot to do in order to make sure there is low inflation rate in Tanzania in order to
reduce price increase for goods and services in Tanzania at household level. This study
recommends that it is necessary to identify the main causes of inflation in Tanzania and
use proper measures to curb it.