chapter 2

Question 1

What is money?

Answer 1

money is anything that is generally accepted as payments for goods and services or that is accepted in settlement of debt.

Used over centuries: cattle, cigarettes, silver and gold, paper money
• It is NOT a factor of production
• Eliminated double coincidence of wants in barter system

Question 2

Functions of money

Answer 2

• Medium of exchange
• Unit of account
• Store of value
• CORE Unit 10: Money and trust are closely related

Question 3

Different kinds of money

Answer 3

• Properties: uniformity, durability, divisibility, and ability to be carried
• Legal tender
• Use of cheque accounts

Question 4

Money in South Africa

Answer 4

• M1 – the conventional measure (medium of exchange)
• M = C (cash) + deposits (D)

• M2 – the broader definition of money (M1 + short- and medium term
deposits)

• M3 – the most comprehensive measure of money (M2 + long term
deposits)

Question 5

Financial intermediaries

Answer 5

• Institutions specialising in financial transactions
• Function: to act as intermediary between the surplus units and deficit units
in the monetary economy.
• Accept deposits and grant credit
• Credit is when a person/institutions lends funds to another person/institution.
• A security is issued to specify the interest rate at which funds have been borrowed as
well as terms of repayment.
• We focus on institutions with a direct bearing on the quantity of money in
the economy
• We are concerned with the demand and supply of money and how it affect
economic activity

Question 6

Demand for money

Answer 6

• Wealth can be held in:
• Real assets: fixed property, valuable goods, shares
• Financial assets: money or interest bearing assets (bonds)
• Cost of holding money
• Opportunity cost: interest forgone
• Impact of inflation
• Two components of the demand for money:
• Transactions demand: medium of exchange
• Demand for money as an asset: store of value

Question 7

Monetary policy

Answer 7

Definition: Defined as measures taken by the monetary authorities to
influence the quantity of money or the rate of interest with a view to
achieving stable prices, full employment and economic growth
• Ultimate objective: Balanced and sustainable economic growth
• Intermediate objective: Pre-announced inflation target
• Operational variable: short term interest rates, governed by the repo
rate

Question 8

South African Reserve Bank

Answer 8

• The central bank and main monetary authority in SA: South African Reserve
Bank (SARB).
• The Constitution of the Republic of South Africa states:
1. The primary objective of the SARB is to protect the value of the currency
in the interest of balanced and sustainable economic growth in the
Republic.
2. SARB, in pursuit of its primary goal, must perform its function
independently without fear, favour or prejudice, but there must be
regular consultation between the Bank and the Cabinet members
responsible for national financial matters.
• Governor: Lesetja Kganyago

Question 9

South African Reserve Bank function

Answer 9

• Key functions:
• Formulation and implementation of monetary policy
• Service to the government (banker, custodian of gold and foreign exchange
reserves, administration of exchange control)
• Provision of economic and statistical services
• Maintenance of financial stability
• Bank supervision
• National payments system
• Banker to other bank
• Issuer of banknotes and coins