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Cpi, The Repo Rate And Sa Current Economic Conditions

1854 words - 8 pages

In has been almost three years since the global financial crisis that started in the United States which was due to housing subprime lending, meaning that loans were being made to people who had difficulty maintaining the repayments on schedule. According to Bernanke (2009:01), “the proximate cause of the crisis was the turn of the housing cycle in the Untied States and the associated rise in the delinquencies on the subprime mortgages, which imposed substantial losses on many financial institutions and shook investor confidence in the credit market”. What happened was that the housing crisis began because too many people made loans and ended up being unable to pay off their mortgage ...view middle of the document...

After the financial crisis policies were implemented to combat the recession which were expansionary monetary and fiscal policy. Monetary policy is the central bank’s attempt to influence the economy by changing the level of reserves in the banking system. "This policy controls the supply and availability of money; it is when a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is ‘macroeconomic stability’ - low unemployment, low inflation, economic growth, and a balance of external payment”, writes Hall (2011:01). When the government purchases bonds by central bank this reduces banks' reserve requirements and drops interest rates in the short run. This is known as an expansionary monetary policy aimed at battling the economic contraction by encouraging consumer spending and investment.
According to Froyen (2002:510), “fiscal policy on their other hand is the levels of the economy that are affected by a government increase or decrease in spending and tax policies”. So what happens is that government tries to influence the behaviour of GDP by increasing government expenditure on goods and services or a decrease in net taxes. But the distance that the aggregate demand curve shifts is smaller for decrease in taxes than for an increase in government expenditure of the same size because government has the positive multiplier effect in the cycler flow of the economy therefore an expansionary stance of fiscal policy involves government spending exceeding tax revenue. Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. “Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand (which is aggregate planned expenditure for goods and services in the open economy denoted as C + I + G + (X-M)”, writes Lipsey (1998:619) where (C) consumers expenditure on goods and services, (I) is investment/gross domestic fixed capital formation, (G) is government final consumption and lastly (X and M) being exports and imports of goods and services respectively. This can be used in times of economic melt down as the necessary tool for building strong economic expansion and working towards eventually having full employment.
Policy responses in terms of the ISLM model
Many countries have responded differently to the 2008 financial crisis, some have used monetary while others have used fiscal policy. “Since late 2008, when South Africa plunged into a recession, the South African Reserve Bank has cut interest rates nine times in an attempt to spur economic growth”, writes Gross (2010:01). South Africa used expansionary monetary in attempts to increase the GDP but what does really mean in terms of the of the ISLM model? According to Parkin et al (2008:688), “the ISLM model...

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