Mutale Dalia Mafwela Student Number:53768655 Exam: ECS3701 May/June 2024 Date: 15" May,2024 STUDENT NAMES: MUTALE DALIA MAFWELA STUDENT NUMBER: 53768655 I MODULE CODE: ECS3701 eeeteay |] Ra [nae | ay BT uv mm elAy ea. : No spacing Hea on e Title Bc. — laces so ie sl esng STUDENT NUMBER: 53768655 MODULE CODE: EcS3701 MAY/JUNE EXAM SESSION: ANSWER SCRIPT .Student Number:53768655 May/June 2024 Mutale Dalia Mafwela Exam: ECS3701 Date: 15" May,2024 pply Q1.3) The transmission mechanisms of monetary policy outline how changes in the money impact economic activity. The most important transmission mechanism is the interest rate Channel which operates as follows: A decrease in the repo rate leads to lower interest rates, which in turn stimulates investment and consumption, resulting in increased real income (Y) and potentially higher prices (P). This is then represented as: repo rate > interest rates > (Mpvestment. LC) > Ty, PT When the repo rate is adjusted, it affects interest rates on various financial products. Typically, domestic banks adjust their lending rates in response to changes in the repo rate, often aligning them closely. In South Africa, movements in the Reserve Bank repo rate, commercial banks' prime overdraft rate, and fixed deposit interest rates are usually synchronized. This adjustment prompts firms and individuals to modify their investment and spending behaviours. Consequently, consumer spending (C}, fixed capital formation (Ipy), and real output (Y) begin to react. This channel plays a crucial role in how demand pressures, transmitted via changes in the output gap, impact inflation.lity: Investigate Normal Nospacing Heading 1 Sis 98.1) 1. True 2. False 3. True 4. False 5. Some stockholders are not residual claimants. &. Where the payments system is heading could influence the way money will be defined in the future. 7-Anominal anchor is a variable that poticymakers use to tie down the price level Sirue 9. True " . I 10False £93.2)/1) increase (2) increase (0) Decrease (4) This is because the prices of domestic stocks and securities increase decrease will not be affected (5) Appreciate (6) Not affected (7) increase (8) Decrease 21 Heading 2a oti, Pind ~ Ea Nospecing Heading] Heading?» Title [| set — 1 Select Safes . sl Mutale Datia Mafwela Student Number:53768655, ‘Exam: ECS3701 ‘May/tune 2024 | Date: 15% May,2024 (0) Increase S (20) Remein unchanged. (02.2) The South African Reserve Bank (SARB}, or central bonk, primarily employs three tools to ‘manage inflation within the econony. Firstly it can utilize monetary policy by raising the repo rate to curb inflation. Such an increase inthe repo rate leads to higher interest cates across the board, subsequently dampening aggregate demand, Ths, in turn, helps mitigate demand-side inflation. ‘Secondly, SARB can engage in open market operations by selling government bonds. This action reduces the money supply in the economy and drives up borrowing costs. Consequently, aggregate demand decreases, further aiding in the reduction of demand-side inflaton, Lastly, the central bank can opt to raise the reserve requireiment ratio, which fimits the amount of ‘funds banks can fend out. This decrease in lending capacity lowers aggregate demand and contributes toa reduction in demand-side inflation. However, implementing contractionary morietary polices to combat inflation can have adverse effects on the economy. It may lead to @ decline in GDP, potentially triggering a recession, This occurs because such policies reduce aggregate demand, resulting in a negative output gap. Additionally, when the increase in inflation is not driven by demand, it becomes more challenging for SARE to effectively cur it, (22.1) | would hold the bonds issued by the company and not the equities issued because bands are a debt liability that the company owes and will have to pay them back first unlike the equity shares or stocks which are controlled by the price per share which will end up fluctuating asthe ‘announcement of the bankruptcy is made public. 02.2) -The bond's face value The carnoration or government agency that isues the bond + CB engin south tea) Aces: Investigate eon Bt @naWseonha ew en SF 26 Partly sunny A & teATG REND - Pacogroph effectively curb it. Styles _ Q2.1) ! would hold the bonds issued by the company and not the equities issued because bands are @ debt lability that the company owes and will have to pay them back first unlike the equity shares or stocks which are controlled by the price per share which will end up fluctuating as the ‘announcement of the bankruptcy is made public. Q2.2) -The bond's face value “The corporation or government agency that issues the bond “The maturity date of the bond; “The bond's coupon rate expressed as a percentage of the face value of the bond. 2.3) A coupon bond is a credit market instrument that pays the owner a fixed interest payment every year until the maturity date, at which time a specified final amount is repaid, Zero-coupon bond {discount bond) is a credit market instrument that is bought at a price below its, face value and whose face value is repaid at the maturity date; it does not make any interest payments. 4.1) b) Repo rate is the instrument of monetary policy that is used by the SARB to control interest rates in South Africa Prime rate is the interest rate that the SARB charges other banks to borrow money from it. 34NoSeacing Heading 1 Heading2 ‘Student Number:53768655 Exam: €CS3701 anv May/June 2024 Mutale Dalia Mafwela : Date: 15 May.2024 ‘ | (Q4.2) | would rather be holding short-term bonds. Long-term bonds have a greater interest rate ‘isk of the two.tnterest rate risk results in greater volatility in the prices and returns of long-term ‘bonds compared to short-term bonds. This is due to the heightened sensitivity of longer-term bonds i to changes in interest rates, coupled with their longer time to maturity exceeding the holding period. Short-term bonds with maturities matching the holding period do not have interest rate risk but instead face reinvestment risk when the holding period exceeds the bond's term to maturity. This ‘occurs because future interest rates are uncertain when reinvestment takes place. 95.2) Financia liberalization or financial innovation occurs when new types of financial product are introduced into an economy. One benefits that it enhances the efficiency of the fnanctal system, offering convenience and time-saving advantages in transactions. I alo inereases accessibility to ‘money and funds. However, a drawback s that can potential lead to financial rises by increasing ‘the complenity and risk exposure of financial transactions. i i (05.3) A budget deficit occurs when government spending exceeds tax revenues within a specific petiod, usually a year. To caver the deficit, the government borrows money by issuing bonds or raises revenue through taxes. intially, the government issues bonds tothe public to finance the deficit. f these bonds don't end up withthe public, the central bank may buy them through open market ppurchases results in.an increase inthe monetary bas (also referred toas high-powered money) and subsequently in the money supply. However, ifthe deficit isnt financed by increased public bond holdings, both the monetary base and money supply can increase. While higher deficits typically lead ‘to more bonds in circulation, causing the supply curve to shift right, the impact depends on whether the deficit is financed by public bond purchases. Thisis done by a process called monetizing the debt which involves funding government spending by exchanging government debt held by the public for high-powered money. This process increeses the monetary base, which comprises the central bank's liabilities uch as currency in circulation and reserves) and the Treasury's labilties (Ike coins in rculation) : ‘ ca) Cj Accessibility: Investigate ae Or eOoOmeebsw:3: en © 26 Party sun| Q5.3) A budget deficit occurs when government spending exceeds tax revenues within a specific period, usually a year. To cover the deficit, the government borrows money by issuing bonds or raises revenue through taxes, Initially, the government issues bonds to the public to finance the deficit. If these bonds don't end up with the public, the central bank may buy them through open market Purchases results in an increase in the monetary base (also referred to as high-powered money) and subsequently in the money supply. However, if the deficit isn't financed by increased public bond holdings, both the monetary base and money supply can increase. While higher deficits typically lead to more bonds in circulation, causing the supply curve to shift right, the impact depends on whether the deficit is financed by public bond purchases. This is done by a process called monetizing the debt which involves funding government spending by exchanging government debt held by the public for high-powered money. This process increases the monetary base, which comprises the central bank's liabilities (such as currency in circulation and reserves) and the Treasury's liabilities (like coins in circulation). Printing money occurs when a government's treasury is legally authorized to issue currency in order to cover its debt. This method involves the direct issuance of currency by the government to finance its deficit. Essentially, the government uses newly created currency to pay for expenditures that exceed its tax revenues. Since this injection of currency directly contributes to the monetary base, both the monetary base and the money supply increase as a result of the Process of multiple deposit creation.