Go to the following website: http://www.federalreserve.gov/releases/h6/current/d

Question

Go to the following website: http://www.federalreserve.gov/releases/h6/current/default.htm Use the seasonally adjusted numbers for Ml and M2 in Table 1 to answer the following questions. What was the total amount in savings accounts in May 2014 and in April 2016. Calculate the percentage change in M1 and M2 from May 2014 and in April 2016. From May 2014 - April 2016, the price level has increased by approximately 3%. Using concepts discussed in class, explain what we know to be true given that inflation is significantly less than changes in M1 and M2.

Explanation / Answer

a) The total amount of saving deposits in April 2016 was $8,369.1 billion and in May 2014 it was $

b) The value of M1 and M2 in April 2016 amounted to $3,183.3 billion and $12,651.5 billion respectively. In May 2014, the same values were $2,791.0 billion and $11,288.6 billion respectively. Thus, the percentage change in M1 was (3183.3 - 2791)/2791 = 12.32 percent. And the the percentage change in M1 was (12651.5 - 11288.6)/11288.6 = 12.07%.

c) From the quantity theory, we know that MV = PY where V is assumed to be constant (or close to 0). This implies that if Y is not changing (Y is real GDP), then every change in money supply M will be absorbed the price. Here money supply M1 and M2 rose by almost 12% but price was increased only by 3%, which suggest that real GDP was also rising.

% change in M = % change in P + % change in Y

12 = 3 + % change in Y

% change in Y = 9%

Hence real GDP must have risen by 9%.

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