ECS3703 Assignment 2 MEMO Semester 1 2025

ECS3703 Assignment 2 MEMO Semester 1 2025 South African Balance of Payments: South African Balance of Payments South African current account South African trade deficit Foreign direct investment in South Africa Capital and financial account South Africa South Africa economic imbalances South African foreign reserves South African trade balance Current account surplus or deficit South African BOP trends Foreign Exchange Market: Stable foreign exchange market Unstable foreign exchange market Exchange rate volatility Forex market equilibrium Foreign exchange market equilibrium Foreign exchange market intervention Exchange rate fluctuations Forex demand and supply curves Exchange rate determination Foreign exchange market stability Elasticity vs. Absorption Approach: Elasticity approach balance of payments Absorption approach balance of payments Balance of payments theories Elasticity approach export demand Absorption approach current account Economic theories on balance of payments Trade balance and exchange rates Elasticity of demand for exports and imports Current account and national income Fiscal policy and balance of payments Sub-Saharan African Countries – Macroeconomic Policy: Sub-Saharan African macroeconomic policy Flexible vs fixed exchange rate systems Covered interest arbitrage Capital mobility Sub-Saharan Africa Fiscal policy in Sub-Saharan Africa Sub-Saharan African exchange rate policy Flexible exchange rate policy Fixed exchange rate policy Interest rates and balance of payments Currency arbitrage and capital flows Optimum Currency Area (OCA): Optimum Currency Area theory OCA and economic integration OCA criteria for currency union Currency area and economic shock OCA in Sub-Saharan Africa Economic structure and currency areas Monetary union in Sub-Saharan Africa Fiscal policies and optimum currency area Labor mobility in optimum currency area Currency area and exchange rate policy South Africa’s Oil Price Shock Adjustment: South Africa oil price shock Aggregate demand and aggregate supply model Oil price inflation South Africa South African economic policies oil shock South Africa’s response to oil price hikes South African monetary policy response Fiscal policy South Africa oil prices Oil price impact on aggregate supply South Africa inflation and output adjustment South Africa macroeconomic policies for oil shocks (a) Discuss the South African balance of payments. [10] (b) With the aid of a diagram, explain the difference between a stable and unstable foreign exchange market. [10] (c) Briefly explain the difference between the “elasticity approach” and the “absorption approach” in terms of the balance of payments. [10] Assume that Sub-Saharan African countries are small countries with perfect capital mobility and a desire to maintain a balanced current account and correct unemployment or inflation. (a) Explain which macroeconomic policy these countries should use to achieve this under a scenario of a flexible and fixed exchange rate systems and why. Discuss the covered interest arbitrage and give two reasons why the net gains from covered interest arbitrage tend to diminish as covered interest arbitrage continues. 10) (b) With the aid of diagrams, briefly explain how the governments of Sub-Saharan African countries can use the relevant policies mentioned in (a) under each scenario Discuss the Optimum Currency Area (OCA). Assume South Africa is an open economy with flexible prices and is experiencing a rapid increase in oil prices. Explain, using the aggregate demand and aggregate supply models in a well-drawn diagram, how the government can use macroeconomic policies to adjust to this shock.