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Microeconomics Chapter Summary
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Simple and easy to read chapter summaries for microeconomics
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Money, The Price Level & Inflation Medium of exchange: any object that is exchanged for goods & services
Unit of account: an agreed measure for stating the prices of goods & services
Store of value
Money is a store of value because it can be held and later exchanged for goods &
services
A house, car & work of art are other examples of stores of money
Money in South Africa Today
Consists of currency & deposits at banks & other institutions
Currency
Notes & coins held by individuals & businesses
Notes & coins inside banks are not counted as currency because they are not held by
individuals
Deposits
Deposits are money because the owners can use them to make payments
Official measures of money
M1
o Currency + cheque deposits by individuals & businesses
M2
o M1 + short- & medium-term deposits, like savings deposits & money market
funds
M3
o M2 + money deposited for a long time, like pension funds
Depositary Institutions
Commercial banks
o A firm that is licensed by the Registrar of Banks (at SARB) to receive deposits and
make loans
o Act as intermediaries between people with excess money, and people that need
to borrow money
Mutual banks
o Operates like a normal bank, but with limited amount of assets
The Postbank
o Offers savings facilities
, Land & Agricultural bank
o Provides financing for agricultural activities in SA
SARB
The central bank of SA
Goal: to contain inflation
Reserve banks goals & targets
Adjusts the Q of money in circulation
Goal: to achieve & maintain price stability in SA’s economic system
Vision: foster a stable financial environment that will allow the economy to thrive
Reserve Bank's policy tools:
Required reserve ratios
o Min % of deposits depositary institutions must hold as reserves
o Cash reserve ratio requires banks to hold a min of 2.5% of its deposits in cash
o Also required to hold 5% of deposits in liquid assets (include treasury bills, gov
bonds & securities)
o If banks have to increase reserves, Q of money in circulation declines, causes price
of money (interest rate) to increase
Repo Rate
o The interest rate at which the RB stands ready to provide liquidity to depositary
institutions against the security of a qualifying asset
Open market operations
o Purchase/sale of Treasury bills issued by the gov & gov bonds. As well as RB
debentures in the open market
o When the RB conducts an open market operation, it transacts with other
businesses but not the government
o By selling bonds & debentures, the RB withdraws money in circulation, & the
interest rate increases
o When the RB buys securities from banks, cash reserves of the bank increases, &
money supply increases, & vice versa
Factors that limit the Q of deposits the banking system can create:
The monetary base
o The sum of banknotes & coins in the economy & deposits that banks keep at the
RB
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