Answer to Question #132059 in Macroeconomics for Samukelo

Question

Q.2.2 Your prescribed text explains that the money stock (M) can be determined endogenously or exogenously (i.e. there are two different approaches to determining the value of M).

Explain which approach is used in the South African macroeconomy.

Answer 1

In the South African macroeconomy, the stock of money supply is endogenously determined.

This means that the stock of money supply in South Africa is determined by the interaction of market forces in the capital and money markets. Thus, money supply is in response to interest rate movements.

The clear evidence is the existence of an unstable M3 money velocity in the economy especially between 1960 to 1996, and the failure by the South African Reserve Bank (SARB) to achieve its M3 money supply growth targets on a consistent basis since mid 1980s. This failure was, according to authorities, a result of the existence of endogenously determined money supply in the economy. It has therefore been established that the SARB controls money supply in the macroeconomy indirectly through the control and changes in interest rates. Money supply, thus, adapts to changes in the market demand for reserves and credit stimulated by interest rate changes. As a result, money supply is thus endogenously determined rather than exogenously/autonomously determined by central authorities.