EXAMPLES:
EXCHANGE RATE AD-AS
R/$ S1 P
S S
D↓ S1 D↑
S↓ S↑
D1
D D
0 D1 Q 0 Y
KEYNESIAN
NB! - Keynesian Model
A The only 3 things that results in a swivel in curve:
**This also only impacts the slope of AD curve
(1) Tax; (2) MPC; (3) MPI - foreign sector
*Any change in autonomous makes the curve shift
Graph to the left:
RED illustrates a swivel
Blue illustrates curve that shifts
0 45˚ Y
RELATIONSHIP AND EFFECT ON THE RAND / DOLLAR EXCHANGE RATE
When Tourists come to SA
Supply for R ↑
Dollars appreciates. Rand depreciates.
When SA citizens go to Usa
Demand for $ ↑
Dollars appreciates. Rand depreciates.
When foreigners sell SA financial assets
Demand ↑
Rand depreciates against dollar
When Gold prices ↑ in SA
Supply ↓ as exports are less as gold is more expensive QTY ↓.
Rand depreciates. Dollar appreciates
The supply of dollars decreases, for example, when households, firms or the government in the
United States import fewer South African goods, or when the price of gold falls on the world market.
Impact of economic Recession in SA on Rand / Dollar
Demand for $ ↓ recession causes a slump in demand.
Supply of $ ↓, QTY $ ↓
Rand depreciates against dollar
Page 1 of 6
, IMPORTANT CONCEPT:
Income
Production Spending
RELATIONSHIP AND EFFECT BETWEEN INTEREST RATES AND DEMAND FOR MONEY
When interest rates ↑ then the opportunity cost of holding money goes ↑
Demand for money therefore goes ↓ because:
People prefer to hold less money and more bonds which they can earn interest on
When interest rates ↓ then the opportunity cost of holding money goes ↓
Demand for money therefore goes ↑ because:
People prefer to hold more money and fewer bonds
RELATIONSHIP AND EFFECT ON REPO RATE ON THE ECONOMY
RepoRate = Rate SARB charges to the commercial banks.
Commercial banks add 3.5% to repo rate and charges us the Prime rate
When repo rates ↑ then prime rate goes ↑
Money demand goes ↓ because people will spend less money
Prices will go ↓
When repo rates ↓ then prime rate goes ↓
Money demand goes ↑ because people will spend less money
Prices will go ↑
HOW MONETARY POLICY CAN BE USED TO COMBAT ↓ OUTPUT, UNEMPLOYMENT AND RECESSION
AD-AS S ↑ and shifts to the right downwards
P (1) Interest rates ↓ Investment Spending ↑
S OR
S1 ↑ in production without ↑ remuneration will ↓ price
(2) When Investment Spending ↑ Output also ↑
P0 (3) If investment spending, however, does not react to interest rate
P1 changes and output and income stays the same, the monetary
transmission mechanism breaks down
D
0 Y
Y0 Y1
Page 2 of 6
EXCHANGE RATE AD-AS
R/$ S1 P
S S
D↓ S1 D↑
S↓ S↑
D1
D D
0 D1 Q 0 Y
KEYNESIAN
NB! - Keynesian Model
A The only 3 things that results in a swivel in curve:
**This also only impacts the slope of AD curve
(1) Tax; (2) MPC; (3) MPI - foreign sector
*Any change in autonomous makes the curve shift
Graph to the left:
RED illustrates a swivel
Blue illustrates curve that shifts
0 45˚ Y
RELATIONSHIP AND EFFECT ON THE RAND / DOLLAR EXCHANGE RATE
When Tourists come to SA
Supply for R ↑
Dollars appreciates. Rand depreciates.
When SA citizens go to Usa
Demand for $ ↑
Dollars appreciates. Rand depreciates.
When foreigners sell SA financial assets
Demand ↑
Rand depreciates against dollar
When Gold prices ↑ in SA
Supply ↓ as exports are less as gold is more expensive QTY ↓.
Rand depreciates. Dollar appreciates
The supply of dollars decreases, for example, when households, firms or the government in the
United States import fewer South African goods, or when the price of gold falls on the world market.
Impact of economic Recession in SA on Rand / Dollar
Demand for $ ↓ recession causes a slump in demand.
Supply of $ ↓, QTY $ ↓
Rand depreciates against dollar
Page 1 of 6
, IMPORTANT CONCEPT:
Income
Production Spending
RELATIONSHIP AND EFFECT BETWEEN INTEREST RATES AND DEMAND FOR MONEY
When interest rates ↑ then the opportunity cost of holding money goes ↑
Demand for money therefore goes ↓ because:
People prefer to hold less money and more bonds which they can earn interest on
When interest rates ↓ then the opportunity cost of holding money goes ↓
Demand for money therefore goes ↑ because:
People prefer to hold more money and fewer bonds
RELATIONSHIP AND EFFECT ON REPO RATE ON THE ECONOMY
RepoRate = Rate SARB charges to the commercial banks.
Commercial banks add 3.5% to repo rate and charges us the Prime rate
When repo rates ↑ then prime rate goes ↑
Money demand goes ↓ because people will spend less money
Prices will go ↓
When repo rates ↓ then prime rate goes ↓
Money demand goes ↑ because people will spend less money
Prices will go ↑
HOW MONETARY POLICY CAN BE USED TO COMBAT ↓ OUTPUT, UNEMPLOYMENT AND RECESSION
AD-AS S ↑ and shifts to the right downwards
P (1) Interest rates ↓ Investment Spending ↑
S OR
S1 ↑ in production without ↑ remuneration will ↓ price
(2) When Investment Spending ↑ Output also ↑
P0 (3) If investment spending, however, does not react to interest rate
P1 changes and output and income stays the same, the monetary
transmission mechanism breaks down
D
0 Y
Y0 Y1
Page 2 of 6
