ECS3701 OCT/NOV 2022 EXAMINATIONS MONETARY ECONOMICS
Oct/Nov 2022 Examinations
ECS3701
Monetary Economics
Question 1
1.1 Would you as a consumer be more or less willing to buy a property under the
following circumstances? Explain your answer.
a. You just inherited R1, 500,000.
More willing to buy a property as it is a store of value, form of wealth, equity and security. It
would save me on borrowing cost if I were to buy same property by mortgage bond or home
loan.
b. Real estate commissions fall from 6% of the sales price to 5% of the sales price.
More willing to buy a property and take advantage of the 1% decrease in real estate
commission.
The lower transaction costs is more encouraging and makes me more willing to buy a property,
and save some rand.
c. You expect Microsoft stock to double in value next year.
Less willing to buy a property as it is more profitable to purchase stock and earn double.
A R1 500 000 in stock ends up R 3 000 000 next year
Because the rate of return from holding a security equals the sum of the capital gain on the
security (the change in the price), plus any cash payments, divided by the initial purchase price
of the security which makes stock a better option than property.
d. Prices in the stock market become more volatile.
More willing to buy a property because of the more volatile nature of stock market prices. In this
case buying stock would be more risky, risk exposure is high therefore a no go which makes
buying a property a safer investment option.
e. You expect housing prices to fall.
Less willing to buy a house because of the unavoidable loss as house price would drop below
purchase price. Would rather wait for the opportune time like when prices reach the bottom and
expectation for prices to rise kicks in.
1
, ECS3701 OCT/NOV 2022 EXAMINATIONS MONETARY ECONOMICS
1.2 Would R200, which is to be received in exactly three years, be worth more to you
today when the interest rate is 12% or when it is 17%? Show your calculations.
Time value is based on the belief that a dollar today is worth more than a dollar that will be
received at some future date (Gitman, 2002).
The present value, PV, of some future amount FV n to be received n periods from now,
assuming an interest rate of i, is calculated as follows:
The equation for Present value:
FV n
PV = n
(1+i)
Substituting FV n =200, n = 3, and i = 0.12
200
PV =
(1+0.12)3
200
=
1.40 49
PV = R142.36
Where i = 17%
200
PV =
(1+0.17)3
200
= 1.6016
PV = R124.88
Therefore worth more when the interest rate is 17%
2
Oct/Nov 2022 Examinations
ECS3701
Monetary Economics
Question 1
1.1 Would you as a consumer be more or less willing to buy a property under the
following circumstances? Explain your answer.
a. You just inherited R1, 500,000.
More willing to buy a property as it is a store of value, form of wealth, equity and security. It
would save me on borrowing cost if I were to buy same property by mortgage bond or home
loan.
b. Real estate commissions fall from 6% of the sales price to 5% of the sales price.
More willing to buy a property and take advantage of the 1% decrease in real estate
commission.
The lower transaction costs is more encouraging and makes me more willing to buy a property,
and save some rand.
c. You expect Microsoft stock to double in value next year.
Less willing to buy a property as it is more profitable to purchase stock and earn double.
A R1 500 000 in stock ends up R 3 000 000 next year
Because the rate of return from holding a security equals the sum of the capital gain on the
security (the change in the price), plus any cash payments, divided by the initial purchase price
of the security which makes stock a better option than property.
d. Prices in the stock market become more volatile.
More willing to buy a property because of the more volatile nature of stock market prices. In this
case buying stock would be more risky, risk exposure is high therefore a no go which makes
buying a property a safer investment option.
e. You expect housing prices to fall.
Less willing to buy a house because of the unavoidable loss as house price would drop below
purchase price. Would rather wait for the opportune time like when prices reach the bottom and
expectation for prices to rise kicks in.
1
, ECS3701 OCT/NOV 2022 EXAMINATIONS MONETARY ECONOMICS
1.2 Would R200, which is to be received in exactly three years, be worth more to you
today when the interest rate is 12% or when it is 17%? Show your calculations.
Time value is based on the belief that a dollar today is worth more than a dollar that will be
received at some future date (Gitman, 2002).
The present value, PV, of some future amount FV n to be received n periods from now,
assuming an interest rate of i, is calculated as follows:
The equation for Present value:
FV n
PV = n
(1+i)
Substituting FV n =200, n = 3, and i = 0.12
200
PV =
(1+0.12)3
200
=
1.40 49
PV = R142.36
Where i = 17%
200
PV =
(1+0.17)3
200
= 1.6016
PV = R124.88
Therefore worth more when the interest rate is 17%
2
