Question

You work as an analyst for an institution located in Riyadh, Kingdom of Saudi Arabia (or KSA).

The Saudi Arabia’s Monetary Authority, KSA’s Central Bank, has recently released a report on the regulation of the quantity of money in the country for the upcoming Year 2021.

In answering the questions that follow: show all relevant formulas and calculations. Keep two decimal points.   

As part of the report, Saudi’s Central Bank created a reference value for money growth between 2020 and 2021, according to which they expect real growth to stay between -4.2% and -6.3%, inflation rate to be between 3.9% and 5.8%, and velocity growth to range between -1.8% and -3.1%.

Using the averages for the figures provided above, calculate KSA’s estimated money growth rate. (2 points)

Suppose that the Central Bank’s report also states that between 2019 and 2020, due to the anticipated inflation in the MENA region brought on by 2020, the Saudi Arabian Monetary Authority is planning to DECREASE the country’s ‘M2’ from SR 230 billion to SR 205 billion (SR = Saudi Riyal).

According to the report, between 2020 and 2021, the KSA’s measure of velocity is expected to stay constant at 3.25.  

Using the Quantity Theory of Money, calculate the percentage change in the KSA’s nominal GDP. (1.5 points)

*** Note: Question 4(b) is not related to Question 4(a).   

The report states that, due to the anticipated deflation in the MENA region brought on by EXPO 2020, between 2020 and 2021, the Saudi Consumer Price Index is expected to DECREASE from 185 to 155.

Using Fisher’s Equation, determine the impact of this change on the level of the nation’s real GDP. (1.5 points)

*** Note: Question 4(c) is a continuation from Question 4(b) and is not related to Question 4(a).

BECN 250 – Money and Banking – Formulas

CPI = Cost of Basket in Current YearCost of Basket in Base Year × 100%

GDP deflator= Nominal GDPReal GDP

Inflation rate 1= New CPI - Old CPIOld CPI ×100% = New Cost of Basket - Old Cost of BasketOld Cost of Basket × 100%

Percentage change = New - OldOld ×100%

% Δ M + % Δ V = % Δ P + % Δ Y = % Δ Nominal GDP   

Money growth + Velocity growth = Inflation + Real growth

Answer 1

A. We know that Money growth + Velocity growth = Inflation + Real growth

t is given that

real growth to stay between -4.2% and -6.3%, meaning its average= (-4.3%-6.3%)/2=-5.3%

inflation rate to be between 3.9% and 5.8%, meaning its average= (3.9%+5.8%)/2=4.85%

velocity growth to range between -1.8% and -3.1%, meaning its average=(-1.8%-3.1%)/2=-2.45%

Putting these in the equation, we get

Money growth-2.45%=-5.3%+4.85%

Money growth=2%

B. It is given that

% Δ M + % Δ V = % Δ P + % Δ Y = % Δ Nominal GDP   

M2 will decrease from SR 230 billion to SR 205 billion. We first need to find the % change. Lets do that

%change in money supply= % Δ M= (205-230)/230=-10.87%.

It is given that there will be no change in velocty, so % Δ V=0. Hence,

% Δ Nominal GDP =-10.87%.

C. The fisher equation states that the nominal GDP growth rate is equal to the sum of the real GDP growth rate plus inflation. In other words

%∆ Nominal GDP ≈ %∆ Real GDP + Inflation Rate

It is given that Saudi Consumer Price Index is expected to DECREASE from 185 to 155. So,

Inflation Rate= (155-185)/185=-16.22%

In part b we calculated that

% Δ Nominal GDP =-10.87%.

Putting these in the equation, we get

-10.87%=%∆ Real GDP-16.22%

%∆ Real GDP=-10.87%+16.22%

%∆ Real GDP=5.35%