PASSMATES TUTORIALS
DISCLAIMER: THIS IS NOT AN OFFICIAL GUIDE FROM UNISA. THE
FRAMEWORK IS NOT PREPARED NOR APPROVED BY UNISA, RATHER
REPRESENTS A POSSIBLE SOLUTION TO THE TASK CONSISTENT WITH
THEORY. THIS FRAMEWORK IS ONLY INTENDED TO ASSIST STUDENTS IN
GETTING STARTED WITH THEIR ASSIGNMENT, AND IN NO CASE THIS
DOCUMENT SHOULD BE USED FOR CHEATING, THUS NO STUDENT IS
ENCOURAGED TO COPY THIS DOCUMENT, NOR ITS SECTIONS FOR
SUBMISSION. WE BELIEVE THE FRAMEWORK WILL BE A GOOD STARTING
POINT AS IT WAS PREPARED BY OUR TEAM OF PROFESSIONAL PRIVATE
TUTORS WHO ARE EXPERTS IN THE FIELD, AND IT WAS PREPARED USING
VARIOUS SOURCES. ANY SIMILARITY WITH ANY EXISTING THEORY OR
DISCUSSION BY OTHER AUTHORS IS EXCUSED. THE AUTHORS HOWEVER DO
NOT CLAIM MONOPOLY TO KNOWLEDGE HENCE MODIFICATION OF THE
ANSWERS CONTAINED IN THIS FRAMEWORK MAY NOT BE PROHIBITED AS IT
CONTRIBUTES TO EXPANSION OF KNOWLEDGE. FOR ANY FURTHER
GUIDELINE ABOUT THE INFORMATION CONTAINED HERE AND THE MODULE
IN GENERAL, CONTACT PASSMATE TUTORIALS.
WE ASSIST WITH OTHER MODULES INCLUDING:
ECSs, FACs, MACs, MNGs, INTs, TRLs, HMEMS, PRMs, PROs, MNBs, DSC, QMI,
MNMs, MNO, MNPs, FIN, PUBs, MNMs, RESEARCH among others.
WE OFFER CLASSES, ASSIGNMENT GUIDELINES, EXAMINATION
PREPARATION, RESEARCH AND RESEARCH PROPOSALS, DISSERTATION
EDITING etc.
OTHER THAN UNISA, WE ALSO ASSIST STUDENTS AT VARIOUS INSTITUTIONS
INCLUDING MANCOSA, REGENT, REGEYNESES, BOSTON, STADIO, OLG, UJ,
UP etc
For any enquiries the following numbers can be used for calling, sms, whatsapp and
telegram
CONTACT PASSMATE TUTORIALS @061 262 1185/068 053 8213/0717 513 144 or
email
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
,PASSMATES TUTORIALS
Table of Contents
1) (a) As an economist, what advice would you give the South African Reserve Bank (SARB) regarding
the continuous increase in interest rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any. If you believe this move is correct,
explain why you think this is so. [10] ....................................................................................................... 3
(b) Which monetary policy mandate is the SARB pursuing? Provide in detail a further illustration of the
chosen mandate. [5] ................................................................................................................................ 4
(c) Which transmission mechanism is the SARB using in this case? Illustrate in detail, the effect of this
channel on the general price level. [7] .................................................................................................... 5
THREE POSSIBLE CHANNELS IN THE SCENARIO ............................................................................ 5
CHANNEL 1. Credit supply .............................................................................................................. 5
CHANNEL 2. Saving and Investment Channel .................................................................................... 6
CHANNEL 3. Cash-flow Channel ...................................................................................................... 7
2. Interest rates have an impact on the overall health of an economy. Explain its importance on the
sides of both the consumers and businesses. [10] ................................................................................. 7
How do Interest Rates Influence the Economy? ................................................................................... 13
Examples and empirical evidence of the contribution of interest rates ................................................. 15
Influence on savings ............................................................................................................................. 15
Influence on investment ........................................................................................................................ 17
Demand management........................................................................................................................... 20
Interest rate reform ................................................................................................................................ 21
3 (a) Explain the main characteristic that any object must have to function as money. [4] .................. 22
(b) What are the 3 types of payment systems? Explain the problems associated with each type. [9] 24
1) electronic Payment ....................................................................................................................... 24
2) e-Money ........................................................................................................................................ 24
3) Commodity Money ........................................................................................................................ 25
4) Fiat Money .................................................................................................................................... 26
4) Describe an advantage and a disadvantage of the fact that monetary policy has so many different
channels through which it can operate. [5) ........................................................................................... 26
Advantage ............................................................................................................................................. 26
Disadvantage ........................................................................................................................................ 26
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
, PASSMATES TUTORIALS
1) (a) As an economist, what advice would you give the South African
Reserve Bank (SARB) regarding the continuous increase in interest
rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any.
If you believe this move is correct, explain why you think this is so. [10]
• Of course, interest rates is the most common and powerful monetary policy tool
in the hands of monetary authorities.
• The government, through the monetary authority, uses the interest rate to
control economic activities and outcome, towards a desired ending, including
low inflation.
• Therefore, the government can continue using the interest rate for the intended
purpose.
• However, it must consider alternative tools such as open market operations and
reserve requirements.
• This is because interest rate can be directly inflationary as interest is a cost of
borrowing hence negatively affect (discourage) investment and consumption,
consequently, reduce real output and can cause unemployment rise.
• If interest has to be used, an optimal interest rate should be set
• Alesina (1988) notes that interest rate must be used cognisant of the transission
mechanism
• Transmission process is generally complex and involves high degree of
uncertainty in terms of timing and size of impact in the economy.
• Barro (1997) adds that transmission mechanism involves long, variable and
uncertain time lags, making it difficult to predict precise effect of monetary policy
actions on targeted variables such as inflation.
• Alternative policy can be used namely fiscal policy or supply side policies to
increase productivity hence reduce inflation
• Fiscal policy can be used together as a policy mix with interest rate
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
DISCLAIMER: THIS IS NOT AN OFFICIAL GUIDE FROM UNISA. THE
FRAMEWORK IS NOT PREPARED NOR APPROVED BY UNISA, RATHER
REPRESENTS A POSSIBLE SOLUTION TO THE TASK CONSISTENT WITH
THEORY. THIS FRAMEWORK IS ONLY INTENDED TO ASSIST STUDENTS IN
GETTING STARTED WITH THEIR ASSIGNMENT, AND IN NO CASE THIS
DOCUMENT SHOULD BE USED FOR CHEATING, THUS NO STUDENT IS
ENCOURAGED TO COPY THIS DOCUMENT, NOR ITS SECTIONS FOR
SUBMISSION. WE BELIEVE THE FRAMEWORK WILL BE A GOOD STARTING
POINT AS IT WAS PREPARED BY OUR TEAM OF PROFESSIONAL PRIVATE
TUTORS WHO ARE EXPERTS IN THE FIELD, AND IT WAS PREPARED USING
VARIOUS SOURCES. ANY SIMILARITY WITH ANY EXISTING THEORY OR
DISCUSSION BY OTHER AUTHORS IS EXCUSED. THE AUTHORS HOWEVER DO
NOT CLAIM MONOPOLY TO KNOWLEDGE HENCE MODIFICATION OF THE
ANSWERS CONTAINED IN THIS FRAMEWORK MAY NOT BE PROHIBITED AS IT
CONTRIBUTES TO EXPANSION OF KNOWLEDGE. FOR ANY FURTHER
GUIDELINE ABOUT THE INFORMATION CONTAINED HERE AND THE MODULE
IN GENERAL, CONTACT PASSMATE TUTORIALS.
WE ASSIST WITH OTHER MODULES INCLUDING:
ECSs, FACs, MACs, MNGs, INTs, TRLs, HMEMS, PRMs, PROs, MNBs, DSC, QMI,
MNMs, MNO, MNPs, FIN, PUBs, MNMs, RESEARCH among others.
WE OFFER CLASSES, ASSIGNMENT GUIDELINES, EXAMINATION
PREPARATION, RESEARCH AND RESEARCH PROPOSALS, DISSERTATION
EDITING etc.
OTHER THAN UNISA, WE ALSO ASSIST STUDENTS AT VARIOUS INSTITUTIONS
INCLUDING MANCOSA, REGENT, REGEYNESES, BOSTON, STADIO, OLG, UJ,
UP etc
For any enquiries the following numbers can be used for calling, sms, whatsapp and
telegram
CONTACT PASSMATE TUTORIALS @061 262 1185/068 053 8213/0717 513 144 or
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
,PASSMATES TUTORIALS
Table of Contents
1) (a) As an economist, what advice would you give the South African Reserve Bank (SARB) regarding
the continuous increase in interest rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any. If you believe this move is correct,
explain why you think this is so. [10] ....................................................................................................... 3
(b) Which monetary policy mandate is the SARB pursuing? Provide in detail a further illustration of the
chosen mandate. [5] ................................................................................................................................ 4
(c) Which transmission mechanism is the SARB using in this case? Illustrate in detail, the effect of this
channel on the general price level. [7] .................................................................................................... 5
THREE POSSIBLE CHANNELS IN THE SCENARIO ............................................................................ 5
CHANNEL 1. Credit supply .............................................................................................................. 5
CHANNEL 2. Saving and Investment Channel .................................................................................... 6
CHANNEL 3. Cash-flow Channel ...................................................................................................... 7
2. Interest rates have an impact on the overall health of an economy. Explain its importance on the
sides of both the consumers and businesses. [10] ................................................................................. 7
How do Interest Rates Influence the Economy? ................................................................................... 13
Examples and empirical evidence of the contribution of interest rates ................................................. 15
Influence on savings ............................................................................................................................. 15
Influence on investment ........................................................................................................................ 17
Demand management........................................................................................................................... 20
Interest rate reform ................................................................................................................................ 21
3 (a) Explain the main characteristic that any object must have to function as money. [4] .................. 22
(b) What are the 3 types of payment systems? Explain the problems associated with each type. [9] 24
1) electronic Payment ....................................................................................................................... 24
2) e-Money ........................................................................................................................................ 24
3) Commodity Money ........................................................................................................................ 25
4) Fiat Money .................................................................................................................................... 26
4) Describe an advantage and a disadvantage of the fact that monetary policy has so many different
channels through which it can operate. [5) ........................................................................................... 26
Advantage ............................................................................................................................................. 26
Disadvantage ........................................................................................................................................ 26
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
, PASSMATES TUTORIALS
1) (a) As an economist, what advice would you give the South African
Reserve Bank (SARB) regarding the continuous increase in interest
rates? In your answer indicate whether you think the SARB MPC is
doing the right thing. Explain why and what can be done better, if any.
If you believe this move is correct, explain why you think this is so. [10]
• Of course, interest rates is the most common and powerful monetary policy tool
in the hands of monetary authorities.
• The government, through the monetary authority, uses the interest rate to
control economic activities and outcome, towards a desired ending, including
low inflation.
• Therefore, the government can continue using the interest rate for the intended
purpose.
• However, it must consider alternative tools such as open market operations and
reserve requirements.
• This is because interest rate can be directly inflationary as interest is a cost of
borrowing hence negatively affect (discourage) investment and consumption,
consequently, reduce real output and can cause unemployment rise.
• If interest has to be used, an optimal interest rate should be set
• Alesina (1988) notes that interest rate must be used cognisant of the transission
mechanism
• Transmission process is generally complex and involves high degree of
uncertainty in terms of timing and size of impact in the economy.
• Barro (1997) adds that transmission mechanism involves long, variable and
uncertain time lags, making it difficult to predict precise effect of monetary policy
actions on targeted variables such as inflation.
• Alternative policy can be used namely fiscal policy or supply side policies to
increase productivity hence reduce inflation
• Fiscal policy can be used together as a policy mix with interest rate
PASSMATE TUTORIALS 061 262 1185/068 053 8213/0717 513 144
