Answer to Question #249554 in Microeconomics for Victoria

Question

As the economies of the whole world grow more interdependent, a country’s monetary policy can no 

longer be conducted without taking international considerations into account.

Using practical examples, discuss how the South African central bank’s Monetary Policy Committee

(MPC) may use the following alternative monetary policy strategies.

i. Capital controls. (10)

ii. Exchange targeting. (15)

QUESTION 2: (25 MARKS)

Using diagrams and examples, compare and contrast the Classical economists’ Quantity Theory and the 

Keynesian’s Liquidity Preference Theory of money demand. (25)

Answer 1

1.

 i) South African central bank’s Monetary Policy Committee can come up with regulations that restrict movement of capital across national borders. For example a policy that state anyone who moves capital out of country should be fined.

ii)South African central bank’s Monetary Policy Committee should intervene the market mechanism to maintain the exchange rate that is desirable. 

2.

Classical economics focuses less on utilization of fiscal policy in managing aggregate demand. The theory is based on monetarism, which focuses on controlling supply of money by the monetary policy. However, Keynesian liquidity preference theory highlights the government is entitled to fiscal policy in controlling instincts such as recession.