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ECS3701 ASSIGNMENT 2 2023 MONETARY ECONOMICS
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- University Of South Africa (Unisa)
ECS3701 ASSIGNMENT 2 2023 MONETARY ECONOMICS
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BMZ ACADEMYBMZ ACADEMY
BMZ ACADEMY 061 262 1185/068 053 8213/0717 513 144
, BMZ ACADEMY
Table of Contents
1) (a) As an economist, what advice would you give the South African Reserve Bank (SARB) regarding
the continuous increase in interest rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any. If you believe this move is correct,
explain why you think this is so. [10] ....................................................................................................... 3
(b) Which monetary policy mandate is the SARB pursuing? Provide in detail a further illustration of the
chosen mandate. [5] ................................................................................................................................ 4
(c) Which transmission mechanism is the SARB using in this case? Illustrate in detail, the effect of this
channel on the general price level. [7] .................................................................................................... 5
THREE POSSIBLE CHANNELS IN THE SCENARIO ............................................................................ 5
CHANNEL 1. Credit supply .............................................................................................................. 5
CHANNEL 2. Saving and Investment Channel .................................................................................... 6
CHANNEL 3. Cash-flow Channel ...................................................................................................... 7
2. Interest rates have an impact on the overall health of an economy. Explain its importance on the
sides of both the consumers and businesses. [10] ................................................................................. 7
How do Interest Rates Influence the Economy? ................................................................................... 13
Examples and empirical evidence of the contribution of interest rates ................................................. 15
Influence on savings ............................................................................................................................. 15
Influence on investment ........................................................................................................................ 17
Demand management........................................................................................................................... 20
Interest rate reform ................................................................................................................................ 21
3 (a) Explain the main characteristic that any object must have to function as money. [4] .................. 22
(b) What are the 3 types of payment systems? Explain the problems associated with each type. [9] 24
1) electronic Payment ....................................................................................................................... 24
2) e-Money ........................................................................................................................................ 24
3) Commodity Money ........................................................................................................................ 25
4) Fiat Money .................................................................................................................................... 26
4) Describe an advantage and a disadvantage of the fact that monetary policy has so many different
channels through which it can operate. [5) ........................................................................................... 26
Advantage ............................................................................................................................................. 26
Disadvantage ........................................................................................................................................ 26
BMZ ACADEMY 061 262 1185/068 053 8213/0717 513 144
, BMZ ACADEMY
1) (a) As an economist, what advice would you give the South African
Reserve Bank (SARB) regarding the continuous increase in interest
rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any.
If you believe this move is correct, explain why you think this is so. [10]
• Of course, interest rates is the most common and powerful monetary policy tool
in the hands of monetary authorities.
• The government, through the monetary authority, uses the interest rate to
control economic activities and outcome, towards a desired ending, including
low inflation.
• Therefore, the government can continue using the interest rate for the intended
purpose.
• However, it must consider alternative tools such as open market operations and
reserve requirements.
• This is because interest rate can be directly inflationary as interest is a cost of
borrowing hence negatively affect (discourage) investment and consumption,
consequently, reduce real output and can cause unemployment rise.
• If interest has to be used, an optimal interest rate should be set
• Alesina (1988) notes that interest rate must be used cognisant of the transission
mechanism
• Transmission process is generally complex and involves high degree of
uncertainty in terms of timing and size of impact in the economy.
• Barro (1997) adds that transmission mechanism involves long, variable and
uncertain time lags, making it difficult to predict precise effect of monetary policy
actions on targeted variables such as inflation.
• Alternative policy can be used namely fiscal policy or supply side policies to
increase productivity hence reduce inflation
• Fiscal policy can be used together as a policy mix with interest rate
BMZ ACADEMY 061 262 1185/068 053 8213/0717 513 144
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