Assignment Cover Page (Not counted in the 5-page limit)
Module Code: ECS3701
Unique Assignment Number: 753379
Student Name & Number: [Your Name and Student Number Here]
Due Date: 29 September 2025
, Question 2.01
(i) The South African Reserve Bank (SARB) has three main tools to combat high inflation:
1. Increasing the Repo Rate: This is the SARB's primary tool. The repo rate is the
interest rate at which the SARB lends money to commercial banks. When the SARB
increases this rate, it becomes more expensive for commercial banks to borrow
money. In turn, commercial banks increase their own lending rates (like prime rates)
for businesses and individuals. This discourages people and companies from taking
out loans for things like cars, houses, or business expansion. With less money being
borrowed and spent, the overall demand in the economy cools down, which helps to
lower inflation.
2. Increasing the Cash Reserve Requirement: Commercial banks are required to hold
a certain percentage of their customers' deposits in reserve, e ectively as cash that
they cannot lend out. If the SARB increases this reserve requirement, banks have less
money available to create new loans. This reduces the amount of money circulating
in the economy (the money supply), which also helps to curb spending and bring
down inflationary pressures.
3. Open Market Operations (Selling Securities): The SARB can sell government
securities (like bonds) to commercial banks and other large financial institutions.
When these institutions buy the bonds, they pay the SARB, which takes money out of
the banking system. This reduction in the amount of money available for lending has
a similar e ect to increasing the reserve requirement, contracting the money supply
and helping to control inflation.
(ii) Adverse e ects of these contractionary policies can include:
Slower Economic Growth and Higher Unemployment: By making credit more
expensive and reducing spending, these policies actively slow down the economy.
Businesses may postpone investments, halt expansion plans, and even be forced to
lay o workers because consumer demand has dropped. This can lead to a rise in
unemployment.
Increased Cost of Servicing Debt: Individuals and businesses with existing variable-
rate debt (like home loans or business loans) will see their monthly repayments
increase. This leaves households with less disposable income to spend on other
goods and services, and it squeezes the profits of companies, potentially leading to
financial distress for some.
Module Code: ECS3701
Unique Assignment Number: 753379
Student Name & Number: [Your Name and Student Number Here]
Due Date: 29 September 2025
, Question 2.01
(i) The South African Reserve Bank (SARB) has three main tools to combat high inflation:
1. Increasing the Repo Rate: This is the SARB's primary tool. The repo rate is the
interest rate at which the SARB lends money to commercial banks. When the SARB
increases this rate, it becomes more expensive for commercial banks to borrow
money. In turn, commercial banks increase their own lending rates (like prime rates)
for businesses and individuals. This discourages people and companies from taking
out loans for things like cars, houses, or business expansion. With less money being
borrowed and spent, the overall demand in the economy cools down, which helps to
lower inflation.
2. Increasing the Cash Reserve Requirement: Commercial banks are required to hold
a certain percentage of their customers' deposits in reserve, e ectively as cash that
they cannot lend out. If the SARB increases this reserve requirement, banks have less
money available to create new loans. This reduces the amount of money circulating
in the economy (the money supply), which also helps to curb spending and bring
down inflationary pressures.
3. Open Market Operations (Selling Securities): The SARB can sell government
securities (like bonds) to commercial banks and other large financial institutions.
When these institutions buy the bonds, they pay the SARB, which takes money out of
the banking system. This reduction in the amount of money available for lending has
a similar e ect to increasing the reserve requirement, contracting the money supply
and helping to control inflation.
(ii) Adverse e ects of these contractionary policies can include:
Slower Economic Growth and Higher Unemployment: By making credit more
expensive and reducing spending, these policies actively slow down the economy.
Businesses may postpone investments, halt expansion plans, and even be forced to
lay o workers because consumer demand has dropped. This can lead to a rise in
unemployment.
Increased Cost of Servicing Debt: Individuals and businesses with existing variable-
rate debt (like home loans or business loans) will see their monthly repayments
increase. This leaves households with less disposable income to spend on other
goods and services, and it squeezes the profits of companies, potentially leading to
financial distress for some.
