fiscal and monetary policies

aims of South Africa's economic policy

• To ensure sustained economic growth

• To keep inflation and unemployment rates low

• To create conditions for long periods of economic expansion

Monetary policy aims

• To maintain price stability (by controlling the level of inflation)

• To achieve full employment 

• To ensure high levels of economic growth

Quantity theory of money equation

MV=PT

Where:

M = Total stock of money

V = Velocity of money

P = Prices of goods and services

T = Quantity of goods and services

Monetary policy instruments

• Interest rates

• Open market transactions

• Moral suasion

• Exchange rate policy

Expansionary fiscal policy

is used when the level of demand is too low. In this case, the government would look to increase aggregate expenditure

The prime rate

minimum interest rate that financial institutions charge for lending money to consumers. It is always higher than the repo rate, allowing commercial banks to cover their profit margins. 

quantitative easing

the sale and purchase of government securities in the open market helping ease money shortages that banks experience. 

Expansionary monetary policy

• The SARB will reduce the repo rate to stimulate economic activity.

• To increase money supply, the SARB will buy government securities from banks.

• To increase money supply, the SARB will reduce the percentage of cash reserves that banks are required to keep. 

FISCAL POLICY

actions taken by the government to influence the economy through taxation, government spending and borrowing

Fiscal policy aims

• To achieve full employment

• To ensure steady levels of economic growth

• To maintain price stability

• To create economic equity

expansionary fiscal policy implementation techniques

 increases in government spending-Increased demand stimulate the economy,creating employment

opportunities. 

• The government implements tax cuts for households and businesses. -Consumers will have more disposable income to spend on goods and services, which increases aggregate expenditure. 

• The government increases spending through borrowing and reduces taxes.-The impact on the economy will be twice as effective because both government spending and consumer spending will increase.

implement contractionary fiscal policy

• Decreasing government spending (G) 

• Increasing taxes (T)

• Decreasing government spending and increasing taxes

The new economic paradigm

^{demand-side policies need to be implemented along with supply-side policies. By so doing, governments may be able to realise longer periods of economic growth without running into supply constraints or the problems of unemployment and inflation.}