IS-LM-BP Examples:

Question 1:

Verlede week het die Monetêre Beleidskomitee die repokoers met 25 basispunte verhoog. Prof
Raymond Parsons het destyds geskryf:

“Die monetêrebeleidsdilemma word versterk deur die uitdaging om hoër leenkoste te gebruik om wat
steeds hoofsaaklik 'kostedruk' of 'aanbodgedrewe' faktore is, soos Eskom-tariewe, brandstofkoste en
voorsieningsbottelnekke, te bekamp. Die gedempte ekonomie beperk die vermoë van produsente om
kostestygings aan verbruikers deur te gee. Die gevaar hier is dat 'n aggressiewe styging in rentekoerse
vanjaar dan eerder net uitset en indiensneming kan benadeel”.

Gebruik die IS-LM-BP-model om prof Parsons se bekommernisse te illustreer.

Last week the Monetary Policy Committee increased the Repo rate by 25 basis points. At the time Prof
Raymond Parsons wrote:
“The monetary policy dilemma is reinforced by the challenge of using higher borrowing costs to combat
what are still primarily 'cost-push' or 'supply-driven’ factors, such as Eskom tariffs, fuel costs and supply
bottlenecks. The subdued economy limits the ability of producers to pass on cost increases to
consumers. The danger here is that an aggressive rise in interest rates this year may then instead just
harm output and employment”.
Use the IS-LM-BP model to illustrate Prof Parsons’ concerns.
Question 2:

Baie van Suid-Afrika se grootste handelsvennote (waarvan die VSA een is) ervaar tans ekonomiese
afswaaie: / Many of South Africa’s biggest trading partners (of which the USA is one) are currently
experiencing economic downswings:
Verduidelik die interne en eksterne effekte van hierdie afswaaie in ons handelsvennote se ekonomieë
op reële rentekoerse (r), inkome (Y) en die betalingsbalans in die Suid-Afrikaanse ekonomie. (Bespreek
die volledige 5 stap kettingreaksie – primêre en drie sekondêre effekte). / Explain the internal and
external effects of these downswings in our trading partner’s economies on real interest rates (r),
income (Y) and the balance of payments in the South African economy. (Discuss the total 5 step chain
reaction – primary and three secondary effects).

Step 1: Primary effect

Initial exogenous impact

Income (Y) of trading partner decrease => exports (X) in South Africa to decrease => Current Account
(CA) decrease (deficit)

Concurrent endogenous impact:

Income (Y) of trading partner decrease => exports (X) in South Africa to decrease => total
expenditure (E) decrease => income (Y) in South Africa decrease

Effect on BoP:

Y decrease => imports (M) decrease => CA increase (deficit reduced)

Step 2: Secondary effect 1: Monetary market effect

Y decrease => Md/P decrease => r decrease => I increase => E increase => Y increase

Effect on BoP:

The decrease in r causes an outflow of foreign capital => Financial account (FA) decrease (deficit)

The increase in Y causes imports to increase (M) => CA decrease (deficit increases)

Step 3: Net effect

Y decrease

r decrease

FA deficit

CA deficit
BoP deficit

Step 4: Initial Bop adjustment process via money supply

BoP deficit => net outflow of foreign capital => Ms/P decrease => r increase => I decrease => E
decrease => Y decrease

Effect on BoP:

The increase in r causes an inflow of foreign capital => Financial account (FA) increase (deficit
reduced)

The decrease in Y causes imports to decrease (M) => CA increase (deficit reduced)

Step 5: Concluding BoP adjustment process via the exchange rate

BoP deficit => net outflow of foreign capital => increase in the supply of Rands => Rand depreciates
=> X increase => M decrease => (X – M) increase=> CA increase (deficit reduced)

Process continues until BoP = 0

Toon grafies die effek van die afswaaie in ons handelsvennote se ekonomieë op interne en eksterne
ewewig in die Suid-Afrikaanse ekonomie met behulp van die IS-LM-BP-diagram. / Illustrate, graphically,
the effect of these downswings in our trading partners’ economies on the internal and external
equilibrium in the South African economy with the aid of the IS-LM-BP diagram.

Primary effect: X decrease

IS left (from IS0 to IS1)
BP left (from BP0 to BP1)
BoP adjustment via Money supply:
BoP deficit => Ms/P decrease => LM left (from LM0 to LM1)
BoP adjustment via the exchange rate:
BoP deficit => Rand depreciates => X increase, M decrease
IS right (from IS1 to IS2)
BP right (from BP1 to BP2)
Calculation Examples:
Gestel die volgende inligting beskryf die ekonomie van Melmeck: / Suppose that the following
information describes Melmeck’s economy:

Outonome verbruiksbesteding / Autonomous consumer consumption = 325

Marginale spaargeneigdheid (MPS) / Marginal propensity to save (MPS) = 0.5

I = 500

G = 425

X = 550

M = 425 + 0.1Y

T = 110 + 0.3Y

1.1 Bereken die vlak van ewewiginkome in Melmeck met behulp van die totale
bestedingsbenadering. / Calculate Melmeck’s level of equilibrium income according to the
total expenditure approach.
Y = C + I + G + (X – M)
Y = 325 + 0.5(Y – 110 – 0.3Y) + 500 + 425 + (550 – 425 – 0.1Y)
0.75Y = 1320
Y = 1760

1.2 Is Melmeck se handelsbalans in ʼn surplus of tekort? Toon al u berekeninge. / Does

Melmeck have a surplus or a deficit on its trade balance? Show all your calculations.
X–M
550 – 425 -0.1(1760) = -51
Deficit

1.3 Bereken die belastinginkomste van die owerheid van Melmeck teen die huidige
inkomstevlak. / Calculate the tax income that the government of Melmeck receives at the
current income level.
T = 110 + 03Y
T = 110 + 0.3(1760)
T = 638
 1.4 Is Melmeck se owerheidsbegroting in ʼn surplus of tekort? Toon al u berekeninge. / Does
Melmeck have a surplus or a deficit on its government budget? Show all your calculations.

Budget = T – G

Budget = 638 – 425

Budget = 213