Chapter 11

Question 1

Bartering system

Answer 1

goods were exchanged for other goods of more or less the same value

Question 2

Liquidity

Answer 2

how quickly money can be converted into cash

Question 2

Primary or liquid money

Answer 2

Cash

Question 2

Legal tender

Answer 2

Medium of payment that, by law, must be accepted. The currency of the country is the legal tender. In SA, Bank notes and coins (Rands).

Question 3

Functions of money

Answer 3

A medium of exchange - So people can get paid
A store of value - People don’t have to spend all of their money they earn, they can store it.
A measure of value (unit of account) - To set a value on the price of goods
A standard of future payment -

Question 4

Secondary money

Answer 4

Demand desposits, bank deposits and EFTs

Question 5

Quasi or near money

Answer 5

Notice accounts

Question 6

M1

Answer 6

for coins and notes in circulation plus cheque accounts (demand deposits)

Question 7

M2

Answer 7

for M1 plus short and medium-term deposits

Question 8

M3

Answer 8

for M2 plus long-term deposits

Question 8

Fiat money

Answer 8

money not backed up by any physical asset or commodity, value comes from government orde

Question 9

Money-associated instruments

Answer 9

Physical Money
Credit cards
Non-conventional - Crypto

Question 9

The value of money

Answer 9

The value of money depends on what our money can buy in terms of goods and services. It has value only in terms of the promise of government.

Question 10

CPI

Answer 10

To measure the value of money, we look at how prices change over time using price indexes such as the Consumer Price Index (CPI), prepared by Statistics South Africa
the CPI measures the change in the average price of a basket of goods and services purchased by a typical urban household

Question 11

Deflation

Answer 11

Occurs when price levels of goods and services decrease continuously over a long time.

Question 12

Inflation

Answer 12

Inflation is defined as a continuous increase in the general price level over a specific period. The CPI shows inflation for consumers.

Question 12

Measures to stabilise inflation

Answer 12

Setting minimum cash reserves
Increasing/decreasing interest rates (SARB)
Setting inflation targets

Question 13

Disinflation

Answer 13

A decrease in the rate of inflation. A temporary slowing of the pace of price inflation. E.g. 7.1% to 5.4%

Question 14

Aims of Monetary Policy

Answer 14

To protect the value of the currency in order to ensure economic growth in the country
To control money supply and credit levels in the financial sectors. i.e. banks must not be at risk of failure
To establish interest rates that will encourage investments and savings but are affordable to those wanting to borrow money
To obtain exchange rates that are to the advantage of the country

Question 14

Reasons for inflation

Answer 14

Increase in oil prices
High salary increases
Increase in consumption
Increase in money supply

Question 14

Interest Rates

Answer 14

The price that borrowers must pay for the use of cash that is not their own, and the return (income) a lender enjoys by parting with their liquidity. Interest is usually expressed as a rate (percentage).

Question 14

Repo (Repurchase) Rate

Answer 14

The rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation.

Question 14

Variable Interest Rates

Answer 14

Fluctuating interest rates are tied to a benchmark rate, which changes periodically.

Question 14

Prime Rate

Answer 14

The interest rate that commercial banks charge their most creditworthy customers, generally large corporations.

Question 14

Fixed Interest Rates

Answer 14

Interest rates are unchanging over a specific period for fixed interest rates.

Question 14

How did Stokvels develop?

Answer 14

Commercial banks have not always provided for small savers or borrowers. People in rural areas developed other ways.

Question 14

Stokvel

Answer 14

A stokvel is a member-owned association in which a group of people enter into an agreement to contribute a certain amount of money, either monthly, fortnightly or weekly.

Question 14

Micro-lending

Answer 14

Micro-lenders lend money over short periods and ask very high interest rates.
Borrowers must make sure that a micro-lending business is accredited.

Question 15

The National Loan Register (NLR)

Answer 15

Information about a borrower is kept on the NLR in order to provide information about the loan applicant’s consumer credit.

Question 16

What is the role of the reserve bank?

Answer 16

The SARB controls the monetary and banking systems of South Africa. Its primary goal is to protect the value of the Rand.

Question 17

Who is responsible for the South African reserve bank?

Answer 17

Mr Lesetja Kganyago is the Governor of the SARB,

Question 18

Monetary Policy Definition

Answer 18

Monetary policy consists of decisions made by the monetary authorities to influence the interest rates and the supply of money (or credit) in the economy.