Question 1 (25) Explain the effectiveness of the exchange rate regime being used in terms of achieving macroeconomics objectively in South Africa. (10) 1.2 Discuss any four macroeconomics objectives...

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African Economy
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Contents
African Economy ............................................................................................................................ 1
Question 1 ....................................................................................................................................... 3
1.1 Explain the effectiveness of the exchange rate regime being used in terms of achieving
macroeconomics objectively in South Africa ............................................................................. 3
Question 2 ....................................................................................................................................... 7
Question 3 ..................................................................................................................................... 11
3.1 Inflation is now a key challenge in many developing countries in Africa. .................... 11
Explain the concept of cost-push and demand-pull inflation with aid of diagrams. Use a
country of your choice to exemplify the effects. (15) ............................................................... 11
Question 4 ..................................................................................................................................... 15
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Question 1 (25)
1.1 Explain the effectiveness of the exchange rate regime being used in terms of
achieving macroeconomics objectively in South Africa. (10)
Answer:
South Africa, cu
ently, uses floating exchange rate regime. Under this regime, although
exchange rate is primarily determined by market forces (i.e. demand and supply of foreign
exchange), South African central bank, however, can participate in this market by buying and
selling cu
encies. At present, central bank is staying out of the market and to allow market to
determine the exchange rate. The South African economy has used the floating exchange rate
egime quite considerably in meeting the macroeconomics objective. This is because a floating
exchange rate regime allows central banks to intervene whenever required in order to meet
different macroeconomic objective.
The macroeconomics objective includes tackling inflation, and improving economic conditions if
the economy is slowing down. If the objective is to tackle the inflation on foreign goods and
services, the South African Central bank would intervene in the foreign exchange market in such
a way that imports become cheaper. The price of imports is inversely related to value of rand. If
the value of rand rises i.e. if the exchange rate appreciates, price of foreign goods and services
would fall because now we are required to pay less for the same amount of goods and services.
Conversely, if the value of South African cu
ency falls i.e. if the values of rand fall, the price of
foreign goods and services in terms of foreign cu
ency would rise as now we will be required to
pay more for the same amount of foreign goods services. So to tackle inflation on foreign goods
and services, the central bank has to choose a policy which causes appreciation in the South
African cu
ency. So the central bank has to sale the foreign cu
ency in exchange for money
supply. The sale of foreign cu
ency would cause increase in the supply of foreign cu
ency in
the foreign exchange market and therefore would lead to appreciation of rand. This has been
shown in the figure A, where due to sale of foreign cu
ency (say, dollar) by the central bank, the
supply of dollar has shifted rightward and as a result exchange rate has fallen (from e1 to e2) i.e.
and has appreciated against dollar.
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Now if the objective to improve the situation in the economy, the central bank has to
manipulated the exchange rate in such a way that it leads to increase in the net export. The net
export is also inversely related to value of rand. If the value of rand rise i.e. exchange rate
declines, the price of export rises (because the value of foreign cu
ency has fallen) whereas the
price of import would falls because now South African consumers would pay less for the same
amount of goods and services. Therefore, in this case, there will be fall in the net export.
Conversely, if the value of rand falls i.e. exchange rate increases, the price of export would fall
where price of imports would increase because now South African consumers would pay more
for the same amount of goods and services. Therefore in this case, there will be increase in the
net export. Given these results, if the South African economy wants to improve the net export so
as to increase the cu
ent economic situation, it would be required to follow a policy which
would lead to depreciation of South African cu
ency i.e. rand. In this case, the central bank
would make purchase of foreign cu
ency in exchange for money supply. This would cause fall
in the supply of foreign cu
ency (say, dollar) as a result, South African cu
ency would
depreciate. This can be seen from the figure B, where because of purchase of foreign cu
ency,
the supply of foreign cu
ency (or dollar) has shifted leftward and as a result, the exchange rate
has increased (from e1 to e2) i.e. rand has depreciated or the price of dollar in terms of rand has
isen.
The following policy response implies that floating exchange rate is very effective in meeting the
macroeconomics objective in South Africa.
Figure A:
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Figure B:
1.2 Discuss any four macroeconomics objectives which can be used to judge the
performance of the economy. (15)
Answer:
There can be many macroeconomic objectives that can be used to judge the performance of the
economy and four of them are;
1. Keeping inflation rate at acceptable levels: Inflation denotes the „price volatility‟ in a
nation. A price volatile nation is likely to have less credibility and is often ranked at the
lower levels while measuring the performance of the economy. This is because, inflation
increases the cost of capital (by increasing in the nominal interest rate) and therefore
causes fall in the investment expenditure in that particular economy. This fall in the
investment expenditure has negative impact on the productivity and hence on
performance of the economy. Moreover, inflation is bad because it leads to fall in the
value of money and thereby causes fall in the purchasing power of public. With fall in
purchasing power, people will be worse off because they would consume less and this
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eventually will lead to fall in the economic activities. So keeping inflation in check is
important.
2. Achieving high growth rate: this is main objective which an economy might want to
achieve. An economy with high growth rate is likely to have more credentials and
therefore would attract more investment. Achieving a respectable growth rate is
important; because otherwise the economy would face unemployment and people would
suffer because of low income.
3. Exchange rate stability; an economy is required to have a stable exchange rate. A stable
exchange rate means there will be less uncertainty and therefore investors would be
encouraged to invest more.
4. Coordination between fiscal and monetary policy: there should full coordination
etween fiscal and monetary policy in terms of their target. The two policies should work
in tandem to meet the objective of the economy. There should not be the case where two
policies are working with opposite goals because if this is so, it would increase the
uncertainty in the market and hence negatively affect the performance of the economy.
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Question 2 (25)
Many analysts in both developed and developing worlds have heavily criticized the cases of
monopolies. Discuss using relevant examples whether it is a good policy for the governments to
completely eliminate monopoly power.
Answer:
First we learn about monopoly market and its characteristics;
Monopoly is a market where there is only one supplier of commodity, no close substitutes are
available and there are ba
iers to entry in the market.
Characteristics/features of monopoly market
1. Single supplie
producer: This is the most important feature of a monopoly market. In
monopoly market, there is only one supplier of commodity and therefore has full control over the
supply of commodity. In this kind of market, there is no difference between market demand and
firm‟s demand curve. This is because there is only one supplier in the market and so whatever
will be market demand will be the demand...