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Chapter 14:
The monetary
sector
Learning outcomes
Once you have studied this chapter you should be able
to
• define money
• describe the functions of money
• describe the main functions of the South African
Reserve Bank
• explain the demand for money
• explain how money is created
• explain the basic instruments of monetary policy
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Define Money
• Money can be simple defined as a current medium of
exchange in the form of coins and banknotes; coins and
banknotes collectively.
• It is the set of assets in the economy that people regularly
use and accept to buy goods and services and settle debts
from each other
BARTER SYSTEM
• Barter is a type of trade where goods or services are
exchanged for a certain amount of other goods or services.
• No money is involved in the transaction
• A common form of barter during colonial times was
tobacco, wheat, rice, meat, salt etc.
• Barter trade is common among people with no access to a
cash economy, in societies where no monetary system
exists
Disadvantage of barter system
• Lack of double-coincidence of wants:
• No common measure of value
• Large number of intermediate transaction
• Indivisible commodities
• Difficult as store of value
• Lack of a system for future payments: no credit no loans
Money therefore:
• Serves as a lubricant or intermediary to smooth the
process of exchange and to make it more efficient
• Money promotes SPECIALIZATION which increases
productivity and efficiency
• Money enables production to take place in advance of
consumption
The functions of money
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Different kinds of money
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Money in South Africa
• The conventional measure (M1)
• A broader definition of money (M2)
• The most comprehensive measure of money (M3)
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Continuation of measurement of money supply in SA
M1 money supply includes coins and currency in circulation—
the coins and bank notes that circulate in an economy that are
not held by the monetary sector.
Closely related to currency are checkable deposits, also known
as demand deposits.
M1 is the supply of money category that serves as a "medium of
exchange". M1, as a supply of money (M) can be expressed as
an identity:
M=C+D
M2
M2 money supply is less liquid in nature and includes
• M1 plus all other short-term and medium-term deposits of
the domestic private sector with monetary institutions
• Short-term (less than 30 days)
• and medium-term notice deposits (30 days to 6 months) are
not immediately available to serve the medium of exchange
function of money.
M3
M3 money supply is the broadest definition of money supply
and is equal to M2 as well as all long-term deposits of the
domestic private sector with monetary institutions
Long term notice deposits have a maturity of more than 6
months.
Includes store of value
Financial intermediaries
• Deals with financial transaction as they only deal with transactions that
involve money rather than goods.
• Main function, namely to act as an intermediary between the surplus
units and the deficit units in the monetary economy.
• Grant credit when a person or institution lends funds to another person
or institution.
• In exchange for the funds a piece of paper (known as a security or credit
instrument) is normally issued. This document stipulates the interest rate
at which the funds are loaned as well as when and how the loan is to be
repaid.
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SOUTH AFRICAN RESERVE BANK
(SARB)
• When was central bank of SA established? 1920
• When it started doing business? 1921
• Who is the governor of SARB? Lesetja Kganyago
• Who is the first black governor of the SARB? Tito Mboweni
• Who is the owner of SARB? Private shareholders
THE SOUTH AFRICAN RESERVE BANK
FOUR (4) MAIN FUNCTIONS OF SOUTH AFRICAN
RESERVE BANK
• Formulation and implementation of monetary policy
• Service to the government
• Provision of economic and statistical services
• Maintaining financial stability
The South African Reserve Bank
FOUR (4) MAIN FUNCTIONS OF SOUTH AFRICAN RESERVE
BANK
Check notes for explanations
• Formulation and implementation of monetary policy
• Service to the government
– Banker and advisor
– Custodian of gold and foreign exchange reserves
– Administration of exchange control
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The South African Reserve Bank
• Provision of economic and statistical services
• Maintaining financial stability
– Bank supervision
– The National Payment System
– Banker to other banks
– Banknotes and coins
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The demand for money
Box 14-3 Bonds, the bond market and the capital market
Table 14-1 The demand for money (or liquidity preference): a
summary (Textbook page 263)
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The demand for money
Figure 14-1 The demand for money (Textbook page 265)
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The demand for money
Figure 14-1 The demand for money continued
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The demand for money
Figure 14-1 The demand for money continued
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The demand for money
• The interest rate
Box 14-4 The inverse relationship between interest rates and bond
prices (Textbook page 266)
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The stock of money: how is money created?
• The role of banks in the money creation process
Box 14-5 Money creation: an example (Textbook page 267)
Figure 14-2 The determination of the quantity of money
(Textbook page 268)
Box 14-6 The traditional
approach to the “supply”
of money and equilibrium
in the money market
(Textbook page 269)
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Monetary policy
• The monetary policy framework in South Africa
Box 14-7 Inflation targeting as a framework
for monetary policy (Textbook page 270)
• The instruments of monetary policy
– Accommodation policy
Box 14-8 Repurchase agreements (REPOS)
(Textbook page 271)
– Open-market policy
– Other instruments
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Bank supervision
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Appendix 14-1:
Keynes’s speculative demand for money
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Important concepts
• Medium of exchange • South African Reserve Bank
• Barter economy • Stock (quantity) of money
• Unit of account • Repurchase tender system
• Store of value • Repo rate
• Commodity money • Classical cash reserve system
• Credit money • Bonds
• Notes and coins in circulation • Demand for money
• Demand deposits • Liquidity preference
• Monetary aggregates • Liquidity requirement
• Financial intermediaries (shortage)
• Securities • Transactions demand
• Monetary authority • Precautionary demand
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Important concepts
• Speculative demand
• Active balances
• Passive balances
• Interest rate
• Monetary policy
• Monetary policy framework
• Monetary growth targeting
• Inflation targeting
• Cash reserve requirement
• Accommodation policy
• Open-market policy
• Interest rates and bond prices
• Bank supervision
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