study+unit+2 (1).pps

7/25/2019 Study+Unit+2 (1).pps

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ECS 1601

Study Unit 2The Monetary Sector


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Try to keep up thegood preparation. If

you study hardnow the e!a"s wi##

$e "uch easier.

Take out your te!t $ook.%eep it ne!t to you&

If the slide has a redspeech bubble thatsays READ section so-

and-so. Then hitpause, read the

section and watch theslide thereafter!

'e"e"$er the

$est way to #earnis to take notesand (S% if you

don)t understand.


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Content

In this study unit you wi## #earn "ore a$out*The functions of "oney

+i,erent kinds of "oney

Money in South (frica

-inancia# inter"ediaries

The South (frican 'esere /ank S('/

The supp#y of "oney

The de"and for "oneyThe eui#i$riu" in the "oney "arket

Instru"ents of "onetary po#icy


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2.1 -unctions of "oney

(#ternatie to an econo"y with "oney is a$arter syste"* peop#e wou#d e!change goodsfor other goods. -or e!a"p#e you cane!change app#es for "i#k.

-or e!a"p#e if +aid has a #ot of app#es fro"the tree in his garden. /ut he needs "i#k.

Then he can trade his app#es for "i#k.

3ro$#e" is he needs to 4nds so"eone thathas a #ot of "i#k and5EE+S 7(5TS app#es.

That is ca##ed dou$#e coincidence of wants

'ead section18.1 in

te!t$ook pg.91:;918


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2.1 Continued

+ue to the ine+ for"ore on "oney as unitof account and store of

a#ue. (nd discuss withyour e;tutor


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2.2. +i,erent kinds of"oney

>arious things hae $een used as "oney inthe past* catt#e seashe##s and een cigarettes.

5ot a## for"s of "oney were practica# it wasdi


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( cheueis not "oney a cheue si"p#ytransfers a de"and deposit fro" one personto another.

Debit cards a#so si"p#y transfers a de"anddeposit fro" one person to another.

redit cardsis a fast way to acuire a s"a###oan fro" the $ank in order to "ake a

purchase. /ut you hae to pay the $ank $ack#ater.

7ith a credit card you do not pay i""ediate#y the$ank does $ut you wi## hae to repay the $ankeentua##y. ?ou are postponing the pay"ent.

Study $o!18;1 onpg. 91@/o! 18;1* .


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2.9. Money in South (frica

To "easure "oney three groups are used*M1 A The conentiona# "easure

Coins and notes that is used by the public PLUSdemand deposits (cheque and transmission

deposits). M= C+ DM2 A ( $roader de4nition of "oney

M PLUS short and medium term deposits

M9 A The "ost co"prehensie "easure of"oney

M! PLUS all lon" term deposits

Puts emphasis on #store o$ %alue& $unction o$ money

'ead section18.9 in

te!t$ook pg.916;91B

7atch 1601+>+ for

"ore on M1M2 and M9.


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2.:. -inancia# inter"ediaries

(n econo"y has a rea# and 4nancia#sector with rea# and 4nancia# transactions

-inancia# transactions is when no goods or

serices are e!changed -inancia# inter"ediaries A act as "idd#e

"an $etween surp#us units peop#e thatsae and de4cit unit peop#e that $orrow

If you #end "oney to a institutionpersonyou get paid) for the "oney interestrate

'ead section18.: in

te!t$ook pg.91B


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2.8. S('/

7hat is the pri"ary o$Dectie of theS('/

See top of page 920 in the te!t $ook

7hat is the four "aDor areas ofresponsi$i#ity of the S('/

1-or"u#ation and i"p#e"entation of "onetarypo#icy

2Serice to the goern"ent93roision of econo"ic and

statistica# serices

:Maintaining 4nancia# sta$i#ity

'ead section18.8 in

te!t$ook pg.91B ; 921


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* or"u a on ani"p#e"entation of "onetary

po#icy Main instru"ent of i"p#e"enting "onetary

po#icy is the repo rate acco""odation po#icyre4nancing syste".

-inancia# inter"ediaries #end "oney to thepu$#ic at interest rates.

/ut the 4nancia# inter"ediaries so"eti"esneed to $orrow "oney fro" so"eone=

-inancia# inter"ediaries $orrow fro" theS('/ at repo rates

Thus the repo rate inFuences the interest rate S('/ can a#so set cash resere reuire"ents

or use open "arket transactions.Interest

'ate'epo 'ate


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2 S('/* serice to thegoern"ent

The S('/ he#ps the goern"ent in 9ways*

/anker and adisor* the goern"ent"ain#y $anks with the S('/. The S('/ can

a#so gie the goern"ent 4nancia# adice Custodian of go#d and foreign e!change

reseres* the S('/ stores a## the country)sgo#d and foreign e!change reseres. They

a#so for"u#ate e!change rate po#icies. (d"inistration of e!change

contro#* the S('/ keeps aneye on the a"ount of

foreign e!change that#eaes the country

9 S('/ i i f


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9 S('/* proision ofecono"ic and statistica#

sericesThe S('/ co##ectsprocesses interpretsand pu$#ishes econo"icstatistics and other

infor"ation. The datathese pu$#icationscontain are "aDor sourceof infor"ation forpo#icy"akers ana#ysts

and researchers.Go check it out on theS('/ we$site you wi##see a #ot of this*


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: S('/* "aintaining 4nancia#sta$i#ity

S('/ are dedicated to 4nancia# and price sta$i#ity.They do this $y== superising $anks in order to ensure a hea#thy$anking syste"= oerseeing the 5ationa# 3ay"ent Syste" 53S

in order to "anage risks in the $anking syste"= $eing the on#y institution that can "ake ordestroy currency.= sering as a $ank for other $anks*

They a#so set the cash resere reuire"ents the isthe #ega# a"ount of "oney a $ank are not a#oud to#end out.

They sett#e o$#igations that one $ank has towardsanother thus they act as a clearin" ban#.

The S('/ is a lender -of-last-resort. If a $ank is

in trou$#e they can $orrow fro" the S('/.


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2.6. Supp#y of "oney

In order to e!a"ine uantity of "oney supp#ied*

7e on#y work with M1

7e assu"e that on#y $anks can ho#d deposits

7e assu"e there is centra# $ank that contro#s theactiities of $anks.

5ow we are going to #ook at three thingsregarding the supp#y of "oney*

1The ro#e of $anks in the "oney creations process

2The resere asset position and the credit"u#tip#ier

9Hther factors that inFuence the "oney supp#y

'ead section18.6 in

te!t$ook pg.921;928


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1 The ro#e of $anks in the"oney creating process

/anks create "oney. /ut how (#so see $o! 18;: in the te!t$ook on page 92:

/anks a##ow the pu$#ic to create de"anddeposits $y "eans of cheue accounts

"eaning peop#e are now a$#e to transfer "oneyto so"eone $y writing a check a pro"ise thatthe $ank wi## pay the"

+e"and deposits can $e created $y giing the

$ank a certain a"ount of "oney and then youget a cheue $ook for the sa"e a"ount

Hr a $ank wi## #end you sa"e a"ount of the"oney so"eone e#se saed if they are sure youwi## $e a$#e to pay it $ack.

7atch 1601+>+ for "oreon $anks that

creates"oney.


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2 The resere asset positionand the credit "u#tip#ier

+aid saed '1 000 at East /ank then Susan ca"e toEast/ank to $orrow '1 000. East /ank said to Susan* J7ewi## #end you +aid)s "oney $ut not a## of it he "ightwant so"e of it $ack. 7e wi## #end you ' @00. The S('/

wi## not a##ow us to #end you "ore than that.K This is an e!a"p#e of the resere asset reuire"ent.

The '900 East /ank ho#ds $ack is the cash resere theS('/ set.

+aid has to trust East /ank otherwise +aid and a##the other East /ankers wi## withdraw a## their "oneyi""ediate#y ca##ed a run on the $ank and East /ankwi## co##apse.

7atch 1601+>+ for "ore

on resereasset

reuire"ents


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2 +o the fo##owing.


on resereasset

reuire"ents


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9 Hther factors that inFuencethe "oney supp#y

The "oney supp#y can a#so $einFuenced due to transactions withother countries. -or e!a"p#e if South

(fricans e!change 'and)s for Euro)sfor a trip to -rance. Hr if ("ericanse!change +o##ars for 'and)s in orderto $uy South (frican goods.

-oreign transactions areinFuenced ia the go#d andforeign e!change reseres.


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2.@. +e"and for "oney

7hat can "ake a person wea#thy

'ea# assets such as property

>a#ua$#e assets such as paintings

and Dewe#ry

-inancia# assets "oney and $onds

Loweer*

The demand for money is the amountthat people want in the form of money


on thede"and for

"oney

'ead section18.@ in

te!t$ook pg.928;92B


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7hy do we hae a de"and for cash If weinested a## our "oney we can earn

"a!i"u" interest. Cash earns 5HI5TE'EST.

-or e!a"p#e*

+aid has '1 000 in his wa##et. If +aidinested the '1 000 at an interest rate of10 he wou#d hae had '1 100. /ut hedid not inest it he kept it in his wa##et.

Thus +aid foregone the '100 interestand that is why we say the opportunitycosts of ho#ding "oney in your wa##et isthe interest rate.


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If +aid cou#d hae earned an e!tra '100. 7hy did he choose toho#d the '1 000 in cash and not to inest it Nohn Maynard %eyneshas three reasons*

1.Le has a transaction demand for money* "eaning he wantsto $uy goods and serices. +aid can on#y $uy goods and sericeswith "oney and not with a $ond or an inest"ent.

2.+aid is unsure of the future he therefore has a precautionarydemand for money. If his car $reaks down or he ce##phone issto#en he has to hae "oney for unforeseen transactions.

9.The speculative motive to ho#d "oney has to do with theopportunity cost of ho#ding "oney. Oet)s say +aid wou#d #ike toinest so"e "oney eery "onth. The 4rst "onth there is interestrate of 1. +aid rea#ises that if he inests with such a weakinterest rate he wi## hae a#"ost no return it is a weakinest"ent and the opportunity cost of haing cash is ery #ow&5e!t year howeer the interest rate is 20 and +aid rushes toinest a## the "oney he can $ecause this is a great inest"ent. Ledoes not want to hae "oney in his wa##et with such highopportunity costs


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(ctie $a#ances

The a"ount of cash youwou#d #ike to ho#d O isdeter"ined $y yourinco"e 5HT the interestrate&

The interest rate has noinFuence on you activede"and to ho#d cash.The graph shows youractive de"and to ho#d

cash. (s it is notinFuenced $y the interestrate it wi## $e the sa"euantity of "oneyde"anded at (5?interest rate

'e"e"$er*this is on#y

your (CTI>Ede"and for

"oney notthe passiede"and&

$%&'%(

Puantity of "oney

Interest'a

te

0i1

0

Meaning ifyour inco"eis ?1 your

de"and for"oney wi## $e

O1

Interest rate

is on the y;a!is& (O7(?Sre"e"$er to

na"e youa!is&

Puantity of"oney is onthe !;a!is&

(O7(?Sre"e"$er to

na"e youa!is&

The activeuantity of

"oneyde"anded is a

straight #ine$ecause it is not

inFuenced $ythe interest rate

Study ta$#e 18;2 in the

te!t$ook onpage 92@


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3assie $a#ances specu#atie"otie

'e"e"$er theopportunity cost of ho#ding"oney That inFuencesthe specu#atie "otie toho#d "oney.

Un#ike the actie de"andfor "oney the passiede"and for "oney orspecu#atie "otie isdeter"ined $y the interestrate&

( high interest rate causesa #ow de"and for "oney

( #ow interest rate causesa high de"and for "oney

Puantity of "oney

Interest'a

te

0i1

0

The passiveuantity of

"oneyde"anded is a

negatie s#oping#ine $ecause itis inFuence $y

the interest rateinversely

'e"e"$er*this is on#y

your 3(SSI>Ede"and for

"oney notthe actiede"and&

$)


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(ctie Q 3assie R Tota#de"and for "oney

$%&'%(

Interes

t'ate

0i1

0

Puantity of "oney OM

Interest'

ate

0i1

0

Interest

'ate

0i1

0

$)

Puantity of "oney OM


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2.B. Eui#i$riu" inthe "oney "arket

Usua##y eui#i$riu" is foundwhere de"and and supp#y

intersects.

In the "oney "arket the supp#y

cure is e!tre"e#y co"p#e! one"ight een say it does not e!ist.

Therefore the eui#i$riu" in the"oney "arket is not deter"ined$y the intersection of the

de"and and supp#y of "oney $ut$y the de"and for "oney andthe interest rate as indirect#y

deter"ined $y the S('/.

'ead section18.B in

te!t$ook pg.92

Puantity of "oney

Interest

'ate

0i1

0

*

D

Eui#i$riu"

Eui#i$riu"


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2.. Instru"entsof "onetary po#icy

%ey "arket;orientated po#icy instru"ents are*(cco""odation po#icy

The S('/ sets a cash resere reuire"ent a "ini"u"percentage of funds that a $ank "ay not #end out toso"eone e#se. If "ore "oney is drawn fro" the $ank than

they hae aai#a$#e the $ank can #end fro" the S('/. TheS('/ can a#so inFuence the interest rate $y changing therepo rate.

Hpen;"arket po#icyIf the S('/ wou#d #ike to decrease the a"ount of "oney inthe econo"y they can write out Treasury /i##s. This is a type

of interest yie#ding inest"ent. The S('/ se## the $ond tothe pu$#ic and so they withdraw "oney fro" the pu$#ic.

3u$#ic de$t "anage"entInterention of foreign e!change "arkets


on thede"and for

"oney

'ead section18.10 in

te!t$ook pg.992;998


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+o you= understand a $arter syste"

know what "oney is and is not

know di,erent types of "oney

know a short history of "oney

know the di,erence $etween M1 M2 and M9 understand the ro#e of 4nancia# inter"ediaries

understand the pri"ary o$Dection of the S('/

know the "aDor functions of the S('/

understand supp#y of "oney understand de"and for "oney

understand eui#i$riu" in the "oney "arket

know the instru"ents of "onetary po#icy


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unit 2.

( ui on this work wi##$e aai#a$#e soon "ake

sure you do it and

discuss itwith your e;tutor&

Done anddusted.+reat

wor#!

study+unit+2 (1).pps

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