ECS3701 exam pack

ECS 3701: Exam Pack 10/11/2018 Question 1 1.1) a. Money Income Money is a stock, it is a certain amount at a given point in time. Page 53 TB or Page 9 Notes Income is a flow of earning per unit of time. b. Money is a liquid asset that can be used to store wealth. Wealth includes several assets which can either be financial or real assets. 1.2) Functions of money: 1. Medium of Exchange Money in the form of currency or checks is a medium of exchange; it is used to pay for goods and services. It promotes economic efficiency by minimizing time spent exchanging goods and services. 2. Unit of Account This is used to measure the value in an economy. We measure the value of goods and services in terms of money resulting in lower transaction costs by reducing the number of prices that need to be considers. The benefits of this function increase as the economy becomes more complex. 3. Store of Value It is a repository of purchasing power over time. It is used to save purchasing power from the time income is received to the time it is spent. Money is liquid referring to the relative speed and ease to which it can be used into a medium of exchange and does not have transaction costs associated with like homes or land that have transaction costs. 1.3) Price stability which bankers define as low and stable inflation is viewed as the most important goal of monetary policy. It is desired because a rising price level (inflation) creates uncertainty in the economy which may hamper economic growth. Inflation also makes it difficult to plan for the future. Question 2 2.1) Six functions of the SARB: a) Issue cash or currency - SARB has the sole right to issue banknotes and coins. The SARB controls the South African Mint Company which issues coins and owns the South African Bank Note Company which prints banknotes. b) Interbank obligations - The SARB provides facilities for clearing and the settlement of interbank obligations. An interbank obligation arises, for example, when deposit holder A, who banks at bank AA, writes a cheque to pay person B, who banks at bank BB. Cheques and electronic payments are cleared centrally by the SARB (through the Automated Clearing Bureau). c) Lender of last resort - The SARB acts as a banker and supervisor for other banks in the sense that it provides accommodation to banks on a daily basis when they experience liquidity shortages. The SARB also holds the statutory cash reserves which all registered banks are required to maintain, banks keep their cash reserves with the central bank in the form of deposits. d) Implementation of monetary (and exchange rate) policy - Monetary policy works through several levels. The first level involves the SARB and the banks by means of the refinancing or accommodation system. e) Banker for government - The main services provided are administering the auctions of government bonds and treasury bills, participating in the National Treasury's debt management meetings and managing the flow of government funds in the money market. f) Custodian of the greater part of South Africa's gold and other foreign exchange reserves – Although banks also hold foreign reserves, they might not necessarily hold sufficient reserves, given the fact that banks are guided by the profit motive