Macroeconomic Essentials (Economics 1B) Unit 3
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Questions and Answers

What is the primary function of money according to the definition?

  • A unit of account
  • A standard of deferred payment
  • A medium of exchange (correct)
  • A store of value

    • Which of the following items has NOT been used as money?

  • Computers (correct)
  • Cocoa beans
  • Seashells
  • Gold

    • What is the name of the institution responsible for administering the South African currency and setting monetary policy?

  • The Ministry of Economic Development
  • The Department of Finance
  • The South African Reserve Bank (correct)
  • The National Treasury

    • What is the term for the measure of money that is defined solely on the basis of the function of money as a medium of exchange?

    <p>M1</p> Signup and view all the answers

    What is included in the M1 measure of money?

    <p>Demand deposits of the domestic private sector with monetary institutions</p> Signup and view all the answers

    According to the Bible, what is the root of all evil?

    <p>The love of money</p> Signup and view all the answers

    What is M2 equal to?

    <p>M1 plus all short-term and medium-term deposits of the domestic private sector with monetary institutions</p> Signup and view all the answers

    What is the ultimate characteristic of an ideal medium of exchange and store of value?

    <p>Uniformity</p> Signup and view all the answers

    What is the major challenge with trading via bartering?

    <p>Establishing a coinciding value of the two goods being exchanged</p> Signup and view all the answers

    What is the function of money in a monetary economy?

    <p>To smooth the process of exchange and make it more efficient</p> Signup and view all the answers

    What is the unit of account in a money economy?

    <p>The rand</p> Signup and view all the answers

    Why is money also a store of value?

    <p>Because it can be used to settle debts in the future</p> Signup and view all the answers

    What is M3 equal to?

    <p>M2 plus all long-term deposits of the domestic private sector with monetary institutions</p> Signup and view all the answers

    What is the advantage of using money as a medium of exchange?

    <p>It eliminates the need for a barter system</p> Signup and view all the answers

    What is the relationship between the function of money as a medium of exchange and as a unit of account?

    <p>They are closely related</p> Signup and view all the answers

    Why does the use of money as a unit of account enable us to calculate the opportunity cost of a good or service?

    <p>Because we can express prices in monetary terms</p> Signup and view all the answers

    What is the purpose of the Reserve Bank accommodating banks at a penalty rate of 0.5 percentage points above the repo rate?

    <p>To punish banks for unacceptable activities in the interbank market</p> Signup and view all the answers

    What is the direct result of changes in the repo rate?

    <p>Changes in the interest rates at which credit is made available by banks to their clients</p> Signup and view all the answers

    What are open market transactions used for?

    <p>To exert a specific influence on interest rates and the quantity of money</p> Signup and view all the answers

    What is an example of a non-market oriented instrument used by monetary authorities?

    <p>Credit ceilings</p> Signup and view all the answers

    What are the underlying assets eligible for repos?

    <p>Government bonds, Treasury bills, Land Bank bills and Reserve Bank debentures</p> Signup and view all the answers

    What is the relationship between the repo rate and the cost of credit in the economy?

    <p>The cost of credit is directly linked to the repo rate</p> Signup and view all the answers

    What is the primary advantage of using money as a store of value?

    <p>It can be exchanged for other goods and services immediately</p> Signup and view all the answers

    What is the main objective of the South African Reserve Bank?

    <p>To protect the value of the currency for sustainable economic growth</p> Signup and view all the answers

    What is the result of a credit transaction between the Treasury and the Central Bank?

    <p>The creation of money</p> Signup and view all the answers

    How do commercial banks create money?

    <p>By accepting cash deposits and lending to borrowers</p> Signup and view all the answers

    What is the effect of foreign trade on the domestic money supply?

    <p>It can either increase or decrease the money supply, depending on the trade balance</p> Signup and view all the answers

    Why is money not always a good store of value?

    <p>Because it can lose its purchasing power during inflation</p> Signup and view all the answers

    What is the name of South Africa's central bank?

    <p>South African Reserve Bank</p> Signup and view all the answers

    What happens to a country's money supply when its gold and foreign exchange reserves increase?

    <p>It increases</p> Signup and view all the answers

    What are the four major areas of responsibility of the South African Reserve Bank?

    <p>Formulation and implementation of monetary policy, service to the government, provision of economic and statistical services, and maintaining financial stability</p> Signup and view all the answers

    What is the opportunity cost of holding any money balance?

    <p>The interest that could have been earned had the money been used to purchase bonds</p> Signup and view all the answers

    What is the effect of capital inflows on the domestic money supply?

    <p>It increases the money supply</p> Signup and view all the answers

    What is an example of a currency that lost its functionality as a store of value?

    <p>Zimbabwean Dollar</p> Signup and view all the answers

    What are the two most important functions of money?

    <p>Medium of exchange and store of value</p> Signup and view all the answers

    What is the primary objective of monetary policy?

    <p>To achieve stable prices, full employment, and economic growth</p> Signup and view all the answers

    Who formulates and implements monetary policy in South Africa?

    <p>The South African Reserve Bank</p> Signup and view all the answers

    What is the main market-oriented policy instrument used by the South African Reserve Bank?

    <p>Accommodation policy</p> Signup and view all the answers

    What is the purpose of repurchase agreements (repos) between the Reserve Bank and its banking clients?

    <p>To provide liquidity to banks</p> Signup and view all the answers

    What is the cash reserve requirement for banks in South Africa?

    <p>2.5% of their total liabilities to the public</p> Signup and view all the answers

    What is the name of the committee responsible for taking decisions on the appropriate monetary policy stance in South Africa?

    <p>The Monetary Policy Committee</p> Signup and view all the answers

    What is the term used to describe the various rates of interest in the economy?

    <p>Interest rate</p> Signup and view all the answers

    Study Notes

    Introduction to Money

    • Money is an essential institution in the economy.
    • Money serves as a medium of exchange, unit of account, and store of value.

    Definition and Characteristics of Money

    • Money is anything generally accepted as payment for goods and services or in settlement of debt.
    • The marginal value of money does not decrease when additional units are added.
    • Characteristics of money:
      • Uniformity: one part has exactly the same characteristics as another.
      • Divisibility: can be divided into infinitely small units.
      • Durability: does not corrode.
      • Portability: high value-to-weight ratio.

    Functions of Money

    • Medium of exchange: facilitates exchange between parties without the need for a double coincidence of wants.
    • Unit of account: a common measure for stating prices of goods and services.
    • Store of value: holds wealth or surplus production.
    • Settling debts: can be used to settle debts in the future.

    Money in South Africa

    • The South African Reserve Bank administers the South African currency and sets monetary policy.
    • Three measures of the quantity of money: M1, M2, and M3.
      • M1: coins, notes, and demand deposits.
      • M2: M1 plus short-term and medium-term deposits.
      • M3: M2 plus long-term deposits.

    South African Reserve Bank

    • Established in the early 1920s.
    • Primary object: to protect the value of the currency in the interest of balanced and sustainable economic growth.
    • Functions:
      • Formulation and implementation of monetary policy.
      • Service to the government.
      • Provision of economic and statistical services.
      • Maintaining financial stability.

    Supply of Money

    • Created through credit transactions between the Treasury, Central Bank, and commercial banks.
    • Banks also create money by lending and receiving deposits.
    • Influenced by foreign trade and international capital movements.

    Demand for Money

    • Amount that participants in the economy plan to hold in the form of money balances.
    • Opportunity cost: interest that could have been earned had the money been used to purchase bonds instead.
    • Two components:
      • Transactions demand: arises from the medium of exchange function.
      • Demand for money as an asset: arises from the store of value function.

    Interest Rates

    • Prices of loanable funds (cost of money).
    • Types:
      • Repo rate.
      • Interbank lending rate.
      • Prime rate of banks.
      • Fixed interest rates.
      • Mortgage rates.
      • Rates on government stock, etc.

    Monetary Policy Framework in South Africa

    • Formulated and implemented by the South African Reserve Bank.
    • Decisions taken by the Monetary Policy Committee (MPC).
    • Instruments:
      • Accommodation policy.
      • Open market policy.
      • Public debt management.
      • Intervention in foreign exchange markets.

    Instruments of Monetary Policy

    • Accommodation policy:
      • Refinancing of liquidity requirements.
      • Repurchase agreements (repos) between the Reserve Bank and banks.
    • Open market policy:
      • Purchase or sale of domestic financial assets to influence interest rates and quantity of money.

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    Description

    This quiz covers the fundamental concept of money, its definition, and significance in the economy. Learn about the characteristics and features of money and how it affects our lives.

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