Answer to Question #156937 in Macroeconomics for KJB SONYONI

Question

4.1 Explain how the decision taken to adjust the repo-rate since the beginning of 2020 will impact the bank-credit channel, the interest rate channel and the exchange rate channel.     [16]

4.2 Discuss by referring to the article above whether or not the repo-rate alone could assist to correct the unemployment rate and low growth trends South Africa is grappling with. Which suggestion was made in this regard?                       [4]

Answer 1

4.1 Repo-rate is the rate at which the central bank of a country lends cash to commercial banks in the act of funds shortages.

Increasing the repo-rate make it more expensive for the banks to borrow money and should lower the bank lending activities. When the repo-rate is changed, the interest rates on overdrafts and other loans extended by the banks also tend to change. Decreasing the repo-rate brings growth and economic development in the country. Consumers will borrow more from banks stabilizing the inflation. A decline in the repo-rate will lead to the banks bringing down their lending rate.

A low repo-rate results into Less cost loans for the people. When the repo-rate increases, the banks reduce the interest rate charged on loans. The loans offered to the consumers have low interest rates, reduced EMls as well.

Higher interest rates in the economy tend to draw foreign exchange investment, increasing the demand for and value for home income. Less interest rate decreases exchange rates.

4.2. Adjustments in repo-rate alone could not correct unemployment rate and the lower growth rate in South Africa.

South Africa records the highest number of jobless people in the country of about 29.1 percent in 2008. Correction on unemployment rate and low growth rate could be corrected through improving the competitiveness in the economy. Increasing net migration. Raising retirement age to increase labour supply and to increase public investment.