ECS3701 EXAM PACK

ECS3701 EXAM PACK 1 | P a g e ECS3701 Oct/Nov 2017 1. Explain the following terms i. Inflation targeting Monetary policy strategy that involves public announcement of a medium-term numerical target for inflation. ii. Interest rate risk The riskiness of earnings and returns that is associated with changes in interest rates iii. Monetary Policy Monetary policy can be defined as the measures taken by the monetary authorities to influence the quantity of money or the rate of interest with a view to achieving stable prices, full employment and economic growth. Monetary policy in South Africa is conducted by the South African Reserve Bank iv. Money Money or money supply is defines as anything that is generally accepted in payment for goods or services or in the repayment of debts. Money is linked to changes in economic variables that affect all of us and are important to the health of the economy. 1.2 Differentiate between hierarchical and dual mandates of monetary policy Hierarchical versus Dual Mandates Hierarchical mandates is when an economic goal, such as price stability, is put first and the say that as long as it is achieved other goals can be pursued. Dual Mandate is when a central bank is required to achieve two co-equal objectives; price stability and maximum employment (output stability) 1.3 Can monetary policy alleviate South Africa ‘s high unemployment problem? Explain The goals of employment and economic growth appear particularly important because of the high unemployment rate, and the prevalence of poverty among large sections of the population. 2 | P a g e The SARB is under pressure to lower interest rates, particularly from the trade unions. Many believe that the advantages of a low interest rate (perceived as higher employment) far outweigh the problems of a low interest rate (a higher rate of inflation). Monetary policy is an ineffective tool to achieve this goal. Several reasons can be put forward in support of this view: 1. Structural unemployment occurs when there is a mismatch between the supply of worker skills and the demand for skill required. Raising the skill level of workers calls for structural solutions, such as a good school system and the development of worker skills and entrepreneurship through education and training. Structural problems of a long term nature are best solved by long term structural solutions. Shortterm solutions like lowering interest rates to solve the structural unemployment problem are generally ineffective and often not sustainable. 2. The case for lower interest rates rests on the assumption it will lead to a higher level of economic activity and employment. The pro