Answer to Question #88508 in Microeconomics for Martha

Question

The general level of prices (represented by, for example, CPI) in the south African economy decelerated from 9% in 2009 to 4% in the first quarter of 2018. Based on this information, the south African reserve bank (SARB) is likely to - repo rate, which will result in a (n) -.

Answer 1

The general price level indicated by CPI is used to work the inflation rate out. Given, the African economy decelerated from 9% in 2009 to 4% in first quarter of 2018, there has been a fall in the rate of inflation. It is noteworthy here that an inflation rate of approximate 6% is considered healthy for an economy to keep moving on growth trajectory. Low inflation rates are indicative of low aggregate demand, falling prices and low growth. 

    Therefore, based on this information, the South African reserve bank is likely to decrease repo rate and this will cause an increase in the money supply of the economy. It is a monetary policy measure and with more money supply, there would be more income leading to greater spending and investment as well as higher aggregate demand. This in turn will control fall in prices and growth can be accelerated. This is how the central bank intervenes using policy measures for achieving stabiliastion.