Exam (elaborations)
ECS3701 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 (833704) - DUE 29 April 2024
- Course
- ECS3701
- Institution
- University Of South Africa
100% TRUSTED workings, explanations and solutions
[Show more]
Content preview
ECS3701Assignment 2
(COMPLETE
ANSWERS)
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]
The South African Reserve Bank (SARB) has several tools at its disposal to combat inflation.
Here are three key ones:
1. Monetary Policy Interest Rate: SARB can adjust the repo rate, which is the interest rate
at which it lends money to commercial banks. By increasing the repo rate, SARB makes
borrowing more expensive for commercial banks, leading to higher interest rates for
consumers and businesses. This decrease in borrowing and spending can help slow down
inflation by reducing aggregate demand in the economy.
2. Open Market Operations (OMOs): SARB can conduct open market operations by
buying or selling government securities in the open market. If SARB sells securities, it
decreases the money supply in the economy, leading to higher interest rates and reduced
spending. Conversely, if SARB buys securities, it injects money into the economy,
lowering interest rates and stimulating spending. These operations can directly influence
the money supply and, consequently, inflation.
3. Reserve Requirements: SARB can also adjust reserve requirements, which are the
minimum proportions of deposits that banks must hold in reserve. By increasing reserve
requirements, SARB reduces the amount of money banks can lend, thus curbing spending
and inflation. Conversely, decreasing reserve requirements allows banks to lend more,
stimulating economic activity but potentially fueling inflation.
However, each of these policies carries potential adverse effects:
Impact on Economic Growth: Tightening monetary policy to combat inflation can slow
down economic growth by reducing consumer spending, business investment, and overall
economic activity. This can lead to higher unemployment rates and lower income levels.
Exchange Rate Effects: Increasing interest rates may attract foreign investment, leading
to an appreciation of the domestic currency. While this can help reduce inflation by
making imports cheaper, it may harm export competitiveness and worsen the trade
balance.
Debt Burden: Higher interest rates increase the cost of borrowing for consumers and
businesses, potentially leading to financial strain and default on existing loans. This can
exacerbate economic inequalities and financial instability.
SARB must carefully weigh these consequences when implementing monetary policy to address
inflationary pressures resulting from global events like the Russian invasion of Ukraine.
Balancing the need to control inflation with supporting economic growth and stability is crucial
for achieving long-term macroeconomic objectives.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through EFT, credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying this summary from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Lela40. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy this summary for R46,54. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
64438 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy summaries for 14 years now