Macroeconomic Essentials (Economics 1B) Unit 3

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?

M1 Signup and view all the answers

What is included in the M1 measure of money?

Demand deposits of the domestic private sector with monetary institutions Signup and view all the answers

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

The love of money Signup and view all the answers

What is M2 equal to?

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

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

Uniformity Signup and view all the answers

What is the major challenge with trading via bartering?

Establishing a coinciding value of the two goods being exchanged Signup and view all the answers

What is the function of money in a monetary economy?

To smooth the process of exchange and make it more efficient Signup and view all the answers

What is the unit of account in a money economy?

The rand Signup and view all the answers

Why is money also a store of value?

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

What is M3 equal to?

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

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

It eliminates the need for a barter system 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?

They are closely related 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?

Because we can express prices in monetary terms 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?

To punish banks for unacceptable activities in the interbank market Signup and view all the answers

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

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

What are open market transactions used for?

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

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

Credit ceilings Signup and view all the answers

What are the underlying assets eligible for repos?

Government bonds, Treasury bills, Land Bank bills and Reserve Bank debentures Signup and view all the answers

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

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

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

It can be exchanged for other goods and services immediately Signup and view all the answers

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

To protect the value of the currency for sustainable economic growth Signup and view all the answers

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

The creation of money Signup and view all the answers

How do commercial banks create money?

By accepting cash deposits and lending to borrowers Signup and view all the answers

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

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

Why is money not always a good store of value?

Because it can lose its purchasing power during inflation Signup and view all the answers

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

South African Reserve Bank Signup and view all the answers

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

It increases Signup and view all the answers

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

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

What is the opportunity cost of holding any money balance?

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

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

It increases the money supply Signup and view all the answers

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

Zimbabwean Dollar Signup and view all the answers

What are the two most important functions of money?

Medium of exchange and store of value Signup and view all the answers

What is the primary objective of monetary policy?

To achieve stable prices, full employment, and economic growth Signup and view all the answers

Who formulates and implements monetary policy in South Africa?

The South African Reserve Bank Signup and view all the answers

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

Accommodation policy Signup and view all the answers

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

To provide liquidity to banks Signup and view all the answers

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

2.5% of their total liabilities to the public 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?

The Monetary Policy Committee Signup and view all the answers

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

Interest rate 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.