South Africa's Monetary Sector - Economics Study Notes

Flashcards defining key vocabulary and concepts for The Monetary Sector in South African Economics, based on the provided study notes.

Money

Anything that is generally accepted as payment for goods and services or that is accepted in settlement of debt.

Double Coincidence of Wants

The central inefficiency of a barter economy where both parties must simultaneously want what the other person has before an exchange can occur.

Medium of Exchange

The primary and unique function of money that eliminates the need for a double coincidence of wants by acting as a lubricant for trade.

Unit of Account

A function of money providing an agreed measure for stating prices, calculating opportunity costs, and compiling aggregate measures like GDP.

Store of Value

A function of money that allows it to hold purchasing power over time; it is the most liquid asset, though it performs poorly during high inflation.

Standard of Deferred Payment

The use of money as an agreed measure for future obligations, such as mortgage repayments and credit agreements.

Income

A flow variable representing rewards earned in production, such as rent, wages, interest, and profit; it is expressed in monetary units but is not money itself.

Wealth

A stock variable representing assets accumulated over time (property, shares, art); money is the most liquid subset of this concept.

Commodity Money

A form of money where the intrinsic value of the object (e.g., cattle, gold coins, cocoa beans) is equal to its exchange value.

Fiat Banknotes

Modern paper money with no commodity backing, whose value rests on government authority and public confidence; they are declared legal tender.

Legal Tender

Payment that cannot be refused by law when offered in settlement of a debt.

M1 (Conventional Monetary Aggregate)

The narrowest measure of money, defined as $M = C + D$, where $C$ is coins and notes in circulation and $D$ is all demand deposits.

Demand Deposits

Bank deposits that are immediately accessible via EFT or debit card; they comprise approximately $93\%$ of the M1 money supply.

M2 (Broader Monetary Aggregate)

A measure consisting of M1 plus short-term deposits (maturity < $30$ days) and medium-term deposits (maturity < $6$ months).

Quasi Money

Assets that are not immediately available as a medium of exchange but are close to M1, such as short and medium-term deposits in M2.

M3 (Most Comprehensive Aggregate)

M2 plus long-term deposits (maturity > $6$ months); the SARB regards this as the most reliable indicator of monetary sector developments.

Financial Intermediaries

Specialized institutions that act as a link between surplus units (savers) and deficit units (borrowers).

Indirect Financing

The most common route for the flow of funds where savers deposit money into financial intermediaries who then lend to borrowers.

Liquidity Preference (L)

John Maynard Keynes's term for the demand for money, distinguishing between transactions and speculative motives.

Transactions Motive (L1)

Active money balances held for day-to-day spending because payments and receipts do not coincide; determined primarily by income ($Y$).

Speculative Motive (L2)

Passive or idle money balances held as a store of value to avoid capital losses on bonds; it is inversely related to the interest rate ($i$).

Opportunity Cost of Holding Money

The interest income forgone by deciding to hold money (cash or demand deposits) instead of interest-bearing bonds.

Bond Price Formula

$$\text{Bond Price} = \frac{\text{Fixed Annual Payment}}{\text{Market Interest Rate}}$$

Endogenous Money

A concept where the money stock is determined by the demand for bank loans and the interest rate set by the central bank, rather than by an independent supply curve.

South African Reserve Bank (SARB)

Established in 1920, its primary object is to protect the value of the currency in the interest of balanced and sustainable economic growth.

Repo Rate

The interest rate at which the SARB lends to commercial banks; it is the primary instrument of monetary policy and affects all other market interest rates.

Accommodation Policy

The SARB's system of managing the daily liquidity needs of private banks through the repo rate tender system.

Open-Market Policy

The buying or selling of domestic financial assets (like Treasury bills) by the SARB to influence bank reserves and the money stock.

Inflation Targeting

A monetary policy framework adopted by South Africa in 2000, setting a target range of $3\text{--}6\%$ for inflation, with a current midpoint target of $4.5\%.$.

Cash Reserve Requirement

The legal requirement that commercial banks hold $2.5\%$ of their total liabilities as cash reserves at the SARB.

Quantitative Easing (QE)

An unconventional monetary policy used when interest rates are at the zero lower bound, involving central bank asset purchases to directly inject liquidity.

Financialisation

The process where the financial services sector grows in relative size compared to the rest of the economy.

Secondary Market

The market where existing financial instruments, such as bonds on the JSE, can be traded before their maturity date.

Transmission Mechanism

The chain of events where changes in the repo rate affect short-term rates, the cost of credit, bank lending, and ultimately inflation and output.