Sent ) DIscourages savings c) Decreases the international competitiveness of Sou

Question

Sent

) DIscourages savings c) Decreases the international competitiveness of South African producers. d) Increases the costs of imported goods. 1.10 During a recession, cyclical unemployment will and cyclical inflation will a) decrease; decrease b) decrease; increase c) increase; increase d) increase; decrease (20) QUESTION 2 2.1 Define Gross Domestic Product (GDP) and discuss the problems associated with GDP as a measure of an (10) economy's total production (10) (30) (15) 2.2 Discuss ANY FIVE (5) ways in which the government intervenes in the economy of your country. 5 QUESTION 3 3.1 Explain the term, unemployment and describe how it is measured. 3.2 Discuss with examples, ANY FIVE (5) types of unemployment that exist in your country 3.3 Discuss the economic and social costs of unemployment in your countr (10) QUESTION 4 (30) 4.1 Differentiate between an exchange rate and the foreign exchange market 4.2 Explain how changes in exchange rates can influence exports and imports 4.3 Discuss ANY FIVE ( in your country. 5) arguments for and against the use of trade barriers by the government of your country. (15) (SACTWU), the South ho would gain and who would of pressure from the Southern African Clothing and Textile Workers Union African government has decided to increase the tariff on textiles. Explain w lose as a result of the decision taken by the South African government 74 PROGRAMME HANDBOOK: JANUARY 2018 INTAKE

Explanation / Answer

2.1

Gross Domestic Product (GDP) is defined as the value of all final goods and services produced in the economy during a given period of time, usually one year. The GDP includes all goods and services that are purchased as the final product, it is measured in value terms, and GDP includes all goods and services produced within a given year and GDP only take into account all domestically produced goods and services.

GDP is not a good measure for standard of living. This is because it has two problems:

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2.2

The government in order to ensure economic growth and stability influence the real variables like output, employment, price level etc. in an economy by adopting either monetary or fiscal policy. A monetary policy influences the variables by changing the money supply and a fiscal policy influences the variables by either changing taxes or the government spending.

There are many tools by which the monetary authority can influence the supply of money. The bank has to hold a portion of its transaction deposit as reserve with the Federal Reserve. The ratio at which it holds its reserve is called required reserve ratio. If the bank reserve at the Fed exceed the required reserve, the reserve over and above requires reserve is excess reserve (ER). Excess reserve does not earn any interest rate and the bank in order to eliminate excess reserve often makes out loans the excess reserve to companies and individuals.

The changes in money supply as the change in the deposit of the bank is determined through the potential deposit multiplier. The potential deposit multiplier is the ratio of potential increase in money supply to the new money injected into the banking system. It is simply the reciprocal of required reserve ratio. By changing this ratio, the central bank changes the amount of money an initial deposit can create.

As the Fed purchase/sell the security in open market, the firm deposits the money in the bank. The banks checking deposit changes. This change in deposit is partly held at Fed and the rest of amount is loaned out. The borrower deposits the loan to their bank and the deposit of the borrower’s bank changes and the bank loaned out the excess of required reserve again. This way the money supply increases each time a new loan is made in the economy. Thus, the same amount of money increases the supply of money by multiple of the initial deposit.

The discount rate is the rate at which the banks take loans from the Fed. The decrease in the discount rate decreases the Federal funds rate. The Federal funds rate is the rate at which the banks extend loans to other banks and financial institution in Federal funds market. The decrease in the interest rate increases the demand for loanable funds in the market. The amount of reserve increases in the economy. The banks loan out these excess reserve and supply of money increases in the economy and vice versa.

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