Answer to Question #272599 in Macroeconomics for Maphula

Question

a. Differentiate headline consumer price inflation from core consumer price 

inflation. (4)

b. Mention three examples of headline consumer price inflation. (3) 

c. “Low inflation against relatively high lending rates has supported the rand’s 

attractiveness as a carry-trade target with yield-hungry investors happy to 

ignore local risks for higher returns”. Clearly explain what this implies. (4) 

d. What was the main reason for the SARB behind reducing interest rates? (2) 

e. Why is it important that South Africa should be consideration of USA’s decisions 

when deciding on its monetary policy stance? (3) 

f. Why do you think the budget speech is important for monetary policy 

committee’s decisions concerning change in interest rates? (2) 

g. What does an undervalued currency imply? 

Answer 1

Solution:

a.). Headline consumer price inflation refers to the total inflation in an economy. The headline inflation figure takes into account inflation in a basket of goods, which includes commodities such as food and energy. It is a more volatile measure of inflation since it includes food and energy prices in its calculation.

Core consumer price inflation refers to inflation that excludes energy and food prices when deriving or calculating inflation. Core inflation is less volatile than headline inflation since it does not include food and energy prices.

 

b.). Examples of headline consumer price inflation include the following:

·        Consumer price inflation.

·        GDP Deflator.

·        The wholesale price index.

 

c.). This implies that low inflation leads to higher interest rates that can be earned, attracting foreign investment and increasing demand for and the value of the home country's currency (rand).

 

d.). The SARB lowered the interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing.

 

e.). It is important for South Africa to consider the USA’s decisions when deciding on its monetary policy stance since these decisions tend to impact the world market and economy as a whole. Therefore, adhering to these decisions steer the country forward towards having a balance and not experiencing any world trade shocks.

 

f.). Communicating this inflation target through the budget speech clearly to the public helps keep judges' longer-term inflation expectations firmly anchored, fostering and enhancing price stability and moderate long-term interest rates, as well as promoting maximum employment.

 

g.). A currency may be undervalued if its exchange rate is lower than it should be. If a country's currency is undervalued, it means the exchange rate for other world currencies is too low.