G23F3371

1.

When the Central Bank increases its target rate, it will shift to the TR curve. Due to the increase
in the nominal or targeted rate of the Central Bank, it will cause the TR curve to move upward to
the left. Our initial equilibrium is at point A and output Y. Increasing the target rate will shit the
TR curve resulting in a new equilibrium which is Bon the diagram. The shift of the TR curve will
increase interest rates, impacting our level of investment by firms. Firms’ investment level is
sensitive to interest rates, which will result in a lower level of investment. This will reduce
production, which affects our output level, as shown in the diagram, from Y to Y1, reducing our
aggregate demand. The higher target rate leads to a higher interbank interest rate as banks will
need to adjust their lending rates to compensate for the increased cost of borrowing funds from
the central.

2.
The Central Bank can't choose exchange and interest rates in an open economy with full capital
mobility. In the above diagram, our initial equilibrium is at point A, with our output level at point
Y. An increase in the target rate by the central bank is, however, affecting the interest rate level,
which in turn affects the TR curve. The TR curve shows monetary policy or the central bank's
response in terms of output and interest rates. In this case, we are dealing with the targeted rate,
which will only affect the TR curve. Due to a change in the target rate, the curve will shift
upwards, showing increased interest rates in SA. A movement from between 1 shows this and I*
to I* 1. An increase in interest rates (rate of return) affects interest rate-sensitive expenditures
such as investments. When there is a change in the I of the country, it affects investment levels.
The increase in I reduces investment by firms due to a higher rate of return on borrowing. This
will also affect the output level; low investment affects our aggregate demand and decreases our
output level. The decrease in output is shown by the movement or shift from Y to Y1, resulting in
a new equilibrium, B. This will affect our money market, whereby the demand for money will
decrease due to high interest rates. This, however, results in a depreciation of rands, causing it to
be weaker in relation to foreign currency. Due to high interest rates abroad and away from home,
in their perspective or eyes, foreign investors have a higher rate of return in relation to their
domestic currency. This will motivate them to borrow from home and lend abroad in South
Africa; the foreign investors will see opportunities to invest in SA. However, foreign investment
in South Africa will create a capital inflow of forex exchange or currency. This is, however,
shown by the shift of the IFM curve from IFM to IFM1, showing the competitiveness in relation
to foreign currency in the International foreign market. A new foreign market is formed at point
B where output has declined, showing an increase in the rate of return of Rand vs foreign
currency attracting forex exchange or currency. However, as stated, the central bank cannot
control interest and exchange rates with full capital mobility. In this instance, they will lose
autonomy over the South African Rand.

3. In the IS-TR-IFM model, the nominal interest rate is endogenous, meaning it is determined
within the model as a result of various factors, such as the demand for money, investment, and
international capital flows. When the central bank raises the target interest rate, it typically does
so to combat inflation or stabilize the economy. In this model, the equilibrium between the IS,
TR, and curves determines the nominal interest rate. When the central bank increases the target
rate, the TR curve shifts upward, as shown in the diagram at B, but the IFM curve shifts in such a
way that the domestic interest rate remains the same. As shown in the diagram at B, the shift of
the IFM curve shows a change in the international foreign rate of return from i* to i*1 with no
change in the domestic interest rate.