Answer to Question #240398 in Economics for Abo

Question

'When managing an economy, a government needs to use a combination of monetary and fiscal policy, as each policy has benefits and limitations'. Evaluate this statement with reference to South African examples.

Answer 1

Monetary policy (monetary policy, monetary policy) - a set of measures by the central bank of the country, as well as by the government, in the context of monetary circulation and lending, including curbing inflation, ensuring employment, regulating economic growth rates, smoothing cyclical fluctuations in sectors of the economy , ensuring the stability of the balance of payments, etc.

The main and main instruments of central banks (CB) in the conduct of monetary policy (MP):

   1) Regulation of the rate of required reserves (regulation of the total money supply in circulation).

Mandatory reserves are a portion of the deposits or cash that they are required to keep with the central bank, depending on the reserve ratio. With an increase in reserve rates, the ability of banks and credit institutions to issue loans is reduced, as a result of additional deductions to the Central Bank, which the bank has no right to use for lending. This tool is rarely used in practice, because it can cause great difficulties for credit institutions, as well as generate great uncertainty in further actions.

   2) Management of the discount rate (refinancing rate, as it is also called).

The rate at which the Central Bank lends to financial and credit organizations. As a rule, banks resort to this operation to replenish reserves, as well as to get out of difficult financial circumstances. These funds received from the Central Bank through the "discount window" represent additional reserves. Regulation of the rate is another measure to influence the money supply, as well as the amount of lending to the real sector of the economy. For a bank, the discount rate, as an indicator of obtaining additional reserves, the higher it is, the less willingly banks are to take from the Central Bank and the less willing they are engaged in lending, and the opposite situation is when the discount rate is lowered. With all this, the Central Bank does not give banks an unlimited amount of liquidity, but strictly monitors who needs and how much and issues a loan, only for specific circumstances in a credit institution. As a rule, the amount of loans does not exceed 2-3% of the number of reserves in the Central Bank itself. As a rule, the influence of the discount rate turns out to be more indicative, shows the direction of the vision and movement of the Central Bank's policy (restraining or stimulating policy).

   3) Operations in the open market (open markets operations).

As a rule, these are transactions in the secondary market for the purchase and sale of short-term government bonds and treasury bills. The difference is that bonds in this case generate percent income, while promissory notes are sold cheaper than later redeemed at par (capital gain). This is also the regulation of the money supply, and also stimulates investment in public debt (by changing the profitability of these instruments). When buying securities from banks, the Central Bank pays in full with the bank for the supply of the asset, and in the case of buying the same assets from the population, the Central Bank puts money on the person's current account, thereby increasing deposits on the bank's balance sheet and thus the bank is obliged to increase its reserves at the Central Bank. When selling securities, the Central Bank replenishes its reserves, as well as with an increase in supply and a decrease in the value of securities, respectively, yield increases, which prompts an increasing number of investors to pay attention to them.

   4) Foreign exchange intervention.

They call direct intervention of the Central Bank on the national currency rate in order to maintain it in a certain range, as well as to smooth out extreme fluctuations.

   5) And others that have little impact on the market