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ECS3701 Assignment 2 Semester 1 2024 (833704) - DUE 29 April 2024
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Assignment 2
Semester 1
2024
(833704) -
DUE 29 April
2024
QUESTIONS WITH WELL OUTLINED ANSWERS
, ECS3701 Assignment 2 Semester 1 2024 (833704) - DUE 29
April 2024
2.1 Given the global increase in inflation resulting from the Russian invasion
of Ukraine, name and explain the three tools that the South African Reserve
Bank (SARB) can use to decrease inflation. What adverse effects can these
central banks' policies have on the economy? [10]
SARB's Tools to Tackle Inflation:
The South African Reserve Bank (SARB) has a toolkit to combat inflation, and
here are three key instruments they can employ in the current situation:
1. Repo Rate: This is the interest rate the SARB charges commercial banks for
borrowing reserves. By increasing the repo rate, the SARB makes
borrowing more expensive. This discourages banks from lending money,
reducing the money supply in circulation. Less money chasing the same
goods and services translates to lower inflation.
2. Open Market Operations: The SARB can sell government bonds in the
open market. This absorbs excess liquidity from the banking system. With
less money readily available, banks become more cautious about lending,
again aiming to curb inflation.
3. Reserve Requirements: The SARB can increase the minimum amount of
reserves that commercial banks must hold. This reduces the amount of
money banks can lend, dampening economic activity and inflation.
Adverse Effects:
These tools, while effective in controlling inflation, can have some drawbacks:
• Slower Economic Growth: Higher interest rates and reduced money supply
can slow down borrowing and investment, hindering economic growth and
potentially leading to job losses.
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