SECTION B: MACROECONOMICS QUESTION 3 The mandate of the South African Reserve Bank (SARB) is to target inflation and keep it within the band of 3% - 6%. The bank does this through adjusting the repo-rates. Discuss three channels of the money transmission mechanism emanating from fluctuations of the interest rates.
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- Explain in detail the process of Monetary Policy transmission of a decrease in the cashinterest rate. Use relevant graphs to describe how a Central Bank’s action on the interest cashrate ripple through the economy and lead to the target policy goal. (Three connected diagramsshould be used: (1) money supply and demand (2) investment demand schedule (3) AS/ADdiagram. Interest rates is the variable that connects the first and second diagram).The following set of equations describe the economy of country A. Lt = 0.2 Ysp = 10 - 2r Msp = 1000 Transactionary demand for money Speculative demand for momey Money supply 1. Interpret the 0.2 coefficient 2. Derive the LM equation and explain what it imply 3.0Highlight three factors that affect the transaction demand for moneyIn the country Constantania, suppose the velocity of money is always the same. Last year, the money supply was $2 billion and real GDP was $5 billion. This year, the money supply increased by 6 percent, real GDP by 4 percent, and nominal GDP is $6.5 billion. a) Calculate the velocity of money and the price levels in the two years, and then calculate the inflation rate. b) Calculate the inflation rate using the formula AM/M + AV/V = AP/P + AY/Y, where the Greek letter A represents a change and the ratio AM/Mx 100 is the percentage change (or the rate of change) in M. Compare this result with the result you obtained in part a. Why could there be some difference? c) What is the difference between commodity money and fiat money? Why do people accept fiat currency in trade for goods and services?
- You are employed at an Economics consulting firm called Eco Xcel. You have been approached bya client who read the article below entitled, “Another big hike raises South African interest ratesnear pre-Covid levels” and who has very limited understanding of monetary policy and how itworks. He has asked you to write a report that provides some clarity on Monetary Policy in thecontext of the South African economy. JOHANNESBURG (Reuters) -South Africa’s central bank delivered another big interest rate hike onThursday, taking its main lending rate back near pre-COVID levels as it battles to bring inflationback to target.The South African Reserve Bank (SARB) raised its repurchase rate by 75 basis points (bps) to6.25%, in line with the forecast of the majority of economists polled by Reuters. The rand pared gains against the U.S. dollar after the decision was announced, as some tradershad positioned for a larger hike.The SARB has now raised rates for the sixth time in a row, adding a total of…You are employed at an Economics consulting firm called Eco Xcel. You have been approached bya client who read the article below entitled, “Another big hike raises South African interest ratesnear pre-Covid levels” and who has very limited understanding of monetary policy and how itworks. He has asked you to write a report that provides some clarity on Monetary Policy in thecontext of the South African economy. Another big hike raises South African interest rates near preCOVID levels. JOHANNESBURG (Reuters) -South Africa’s central bank delivered another big interest rate hike onThursday, taking its main lending rate back near pre-COVID levels as it battles to bring inflationback to target.The South African Reserve Bank (SARB) raised its repurchase rate by 75 basis points (bps) to6.25%, in line with the forecast of the majority of economists polled by Reuters. The rand pared gains against the U.S. dollar after the decision was announced, as some tradershad positioned for a larger…Question 4Suppose a country’s inflation level is higher than desired, and unemployment levels arelower than expected – the central bank decides that the economy is ‘overheated’ andattempts to use the appropriate monetary policy to deal with the situation. Describe,with the help of the appropriate figure, how a central bank might go about implementingsuch monetary policy, the subsequent effects this has on interest rates, the quantity ofmoney in the market, and the process through which this affects the level of expenditurein the economy.
- The central bank of Trinidad and Tobago decides to pursue acontractionary monetary policy. Provide a table with the money supply data and inflationrate for Trinidad and Tobago for 2014 - 2019.Based on the data from Trinidad, do you agree with thecentral bank’s decision to pursue a contractionary monetary policy? Explain why orwhy not.Suppose the velocity of the maoney is constant and potential GDP is growing at 31 percent. Based on the Bank of Canada's target inflation rate, what is the growth ate of the money supply? Mutipie Choice 5% 0%Explain the role of reverse repo rate in controlling the money supply in economy
- Suppose you observe the time series of output y and real money supply M/ P reported in the Figure below. Nominal money supply M is under full control of the Central Bank. Output y Real Money Supply M$1P Time t Time t 1 2 3 4 5 6. 1 3 4 Interpret these time series using the ASAD Redux model with workers misperceptions (Lecture Notes, Chapter 1). Assume that the time paths are caused by a single permanent shock hitting the economy at time t = 1, and interpret time t= 6 as the medium run. Your general task is to guess what type of shock can be responsible for the observed time series. Answer each of the following questions, providing clear motivation for your statements: (d) Can the shock be of a permanent change, positive or negative, in the slope of labour supply B? Motivate your answer. Add any further considerations that you think can be relevant to this exercise.The central bank of Barbados decides to pursue an expansionary monetary policy. i) identify one possible action they could take ii) Carefully explain in as much detail as possible, how the chosen action will impact money market. iii) Illustrate with a diagramthe overall impact of the chosen action on the money market.D) what kind of monetary policy might be helpful to stabilize the economy ( expansionary or contractionary)? E) what specific monetary policy tools does the federal reserve have available to use in this scenario? F) explain in detal, how should the federal reserve use each ofthese tools to maximize their effect in stabilizing the economy, what will be the likely effect of each monetary tool's use on the money supply , and the resulting impact on the economy