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ECS3701 Assignment 2 Semester 1 Memo | Due 9 May 2025. All questions fully answered. 1. Read the following excerpt from News24 below and answer the questions that follow.
The inflation and inflation expectation is better today; we lowered borrowing costs and this will
support economic activity. However, risks to domestic inflation and growth have risen markedly since
the start of the year,” Kganyago said.
The South African Reserve Bank kept the key interest rate unchanged at 7.5% last month after three
successive 25 basis point cuts because of the extreme levels of uncertainty as trade tensions escalate.
“With the recent softening in inflation, the Sarb has cut interest rates by a cumulative 75 basis points
since September 2024, reducing the degree of policy restrictiveness,” the central bank said in a
statement on X. “Given the upside risks over the medium-term horizon, the current monetary policy
stance is deemed appropriate.”
Source: Uncertainty risks higher rates, says Reserve Bank
A) According to this excerpt, with the recent monetary policy stance on keeping the repo rate
unchanged, what effect will this have on the economy. Will this monetary policy approach have a
positive, negative or a more neutral effect on the economy? Explain your answer.
B) Given the interest rates cut in the previous months, do you think the South African Reserve
Bank (SARB) took a good decision to now keep rates on hold due to global trade tensions and
uncertainty? Explain your answer through the transmission mechanism and discussing how
interest rates cut affect trade and therefore aggregate output and price stability.
2. What is nominal anchor? Explain the two ways in which a credible nominal anchor can be
beneficial.
3. Classify each of the following as either a policy instrument or an intermediary target. Explain
your answer.
A) Long-term interest rates
B) Central bank interest rates
C) M2
D) Reserve requirements
E) Employment rates
4. Differentiate between the main factors in the initiation of financial crises between the
advanced and emerging market economies.
5. The two ways in which government can finance its deficit is through monetizing the debt and
printing money. Explain each of these two ways in detail and what happens to monetary base
and money supply.
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