CH10: Fiscal & Monetary Policy Flashcards
What are the four main functions of money?
Medium of exchange, unit of account, store of value, standard of deferred payment.
What is the difference between commodity money and fiat money?
Commodity money has intrinsic value; fiat money has no intrinsic value but is declared legal tender by government.
What is a double coincidence of wants?
A situation in a barter economy where both parties must want what the other offers to make an exchange.
What are the three main functions of the South African Reserve Bank (SARB)?
Formulation and implementation of monetary policy, service to government, maintaining financial stability.
What is the main tool used by SARB for monetary policy?
The repo rate through the Bank’s accommodation policy or refinancing system.
How does the repo rate influence the economy?
It affects interest rates, credit availability, and ultimately consumption and investment.
What are the three services SARB provides to government?
Acts as banker and advisor, manages foreign exchange reserves, and administers exchange control.
How does SARB contribute to financial stability?
Through bank supervision, national payment system management, acting as banker to banks, and issuing currency.
What are the two main instruments of monetary policy in SA?
Accommodation policy (repo system) and open market policy (buying/selling government securities).
What is the purpose of the cash reserve requirement?
To ensure banks hold a minimum percentage (2.5%) of their liabilities as reserves with the Reserve Bank.
What is the role of open market operations in monetary policy?
To influence liquidity by buying/selling financial assets, affecting cash reserves and interest rates.
What is fiscal policy?
Government policy on spending, taxation, and borrowing to influence economic activity.
What are the main instruments of fiscal policy?
Government spending and taxation.
What is the difference between fiscal and monetary policy?
Fiscal policy is controlled by government and involves spending/taxation; monetary policy is controlled by the central bank and involves interest rates/money supply.
What is the typical fiscal policy response during a recession?
Expansionary policy: increased government spending and/or reduced taxes to stimulate demand.
What is the typical fiscal policy response during inflationary periods?
Contractionary policy: reduced spending and/or increased taxes to cool down the economy.
What are the economic classifications of government spending?
Consumption spending and investment spending.
What are some drivers of increased government spending?
Changing consumer preferences, political shocks, income redistribution, misconceptions, population growth and urbanisation.
What is the role of public corporations in the public sector?
To provide essential services like electricity, transport, and water (e.g., Eskom, Transnet, Rand Water).
What is a budget deficit?
The shortfall when government spending exceeds tax revenue.
Why must fiscal and monetary policy be coordinated?
To prevent one policy from negating the effects of the other, ensuring effective macroeconomic management.
What are the three main ways government finances its expenditure?
Income from property, taxes, and borrowing.
What does income from property include?
Dividends and interest from state-owned enterprises, profits from government production, rents, license fees, and sales of natural resources.
What is the largest source of government revenue?
Taxation.
Why does the government borrow money?
To finance the budget deficit when tax revenues are insufficient.
What happens when the government borrows money?
Public debt increases, leading to interest payments on the debt.
What is a budget deficit?
The difference between government expenditure and its revenue.
What are taxes?
Compulsory payments made to the government.
Why is taxation considered an emotional economic issue?
People generally dislike paying taxes and feel overburdened.
Who pays company tax?
Companies as separate legal entities.
Why is calculating company tax complex?
It requires knowledge of accounting and tax laws to calculate profits.
What is VAT?
Value-Added Tax, a regressive tax on most goods and services.
Why is VAT considered regressive?
Because low-income earners spend more of their income on VAT-taxed goods than high-income earners.
Why is it politically difficult to raise VAT in South Africa?
Due to the high number of poor households who would be disproportionately affected.
