ECS3703 Assignment
2 (100% COMPLETE
ANSWERS) Semester
1 2025
NO PLAGIARISM
[Pick the date]
[Type the company name]
, 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.
(a) Discuss the South African Balance of Payments. [10]
The Balance of Payments (BoP) is a record of all economic transactions between South Africa
and the rest of the world over a specific period. It consists of three main accounts:
1. Current Account:
o Records exports and imports of goods/services, net income (like dividends and
interest), and current transfers.
o South Africa often runs a trade deficit, meaning imports > exports.
o A current account deficit suggests the country is spending more on foreign
goods/services than it earns from exports.
2. Capital and Financial Account:
o Records capital transfers and transactions in financial assets.
o Includes Foreign Direct Investment (FDI), portfolio investment, and other
financial flows.
o South Africa attracts FDI mainly in mining, telecoms, and manufacturing.
3. Official Reserves Account:
o Shows changes in the South African Reserve Bank’s foreign currency reserves.
o Used to stabilize the currency during volatility.
Economic Imbalances:
Deficits often financed through capital inflows.
Large current account deficits may signal vulnerability, leading to currency depreciation.
(b) Stable vs. Unstable Foreign Exchange Market (With Diagram) [10]
Stable FX Market:
Demand = Supply for forex.
Small changes in exchange rate → restore equilibrium.
E.g., depreciation increases exports → raises forex supply → stabilizes.
Unstable FX Market:
Demand and supply are highly elastic.
Small changes → large shifts in demand/supply → further away from equilibrium.
2 (100% COMPLETE
ANSWERS) Semester
1 2025
NO PLAGIARISM
[Pick the date]
[Type the company name]
, 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.
(a) Discuss the South African Balance of Payments. [10]
The Balance of Payments (BoP) is a record of all economic transactions between South Africa
and the rest of the world over a specific period. It consists of three main accounts:
1. Current Account:
o Records exports and imports of goods/services, net income (like dividends and
interest), and current transfers.
o South Africa often runs a trade deficit, meaning imports > exports.
o A current account deficit suggests the country is spending more on foreign
goods/services than it earns from exports.
2. Capital and Financial Account:
o Records capital transfers and transactions in financial assets.
o Includes Foreign Direct Investment (FDI), portfolio investment, and other
financial flows.
o South Africa attracts FDI mainly in mining, telecoms, and manufacturing.
3. Official Reserves Account:
o Shows changes in the South African Reserve Bank’s foreign currency reserves.
o Used to stabilize the currency during volatility.
Economic Imbalances:
Deficits often financed through capital inflows.
Large current account deficits may signal vulnerability, leading to currency depreciation.
(b) Stable vs. Unstable Foreign Exchange Market (With Diagram) [10]
Stable FX Market:
Demand = Supply for forex.
Small changes in exchange rate → restore equilibrium.
E.g., depreciation increases exports → raises forex supply → stabilizes.
Unstable FX Market:
Demand and supply are highly elastic.
Small changes → large shifts in demand/supply → further away from equilibrium.
