1.

Assignment

Faculty: Commerce and Law

Module Code: COECB1
Module Name: Economics 1B
Content Writer: Tawanda Chabara
Internal Moderation: Mpumelelo Booi
Copy Editor: Community of practice
Total Marks: 80
Submission Week: Week 6

This module is presented on NQF level 5.

5% will be deducted from the student’s assignment mark for each

calendar day the assignment is submitted late, up to a maximum
of three calendar days. The penalty will be based on the official
campus submission date.

Assignments submitted later than three calendar days after the

deadline or not submitted will get 0%. [1]

This is a group assignment.

Groups should consist of 4–6 members.

This assignment contributes 20% towards the final mark.

[1] Under no circumstances will assignments be accepted for marking after the assignments of other students have been marked and returned to the

students.

3. Section A

3.1. Question 1

Question 1

Study the scenario and complete the questions that follow:

Statement of the Monetary Policy Committee

As we move towards the end of the year, global inflation is slowing and nearing targets.
Given these gains, major central banks have lowered rates. We saw the European Central
Bank cut again last week, the Bank of England eased in August, and the US Federal
Reserve reduced rates last night. The US dollar has also cooled off in recent months,
providing some respite for other currencies, including the rand.

Despite these welcome developments, central banks are moving carefully, and policy
stances remain relatively tight. Economic activity in major economies has been resilient,
even as inflation eases. Underlying measures of inflation have also fallen less than
headline, primarily because of elevated housing inflation, and robust wage growth. The
case for caution is further bolstered by the difficult and unpredictable geopolitical
environment, with risks of inflationary shocks through trade restrictions and supply chain
disruptions, among other factors.

Overall, global conditions have become more favourable, but there are still risks. A ‘soft
landing’ is looking more likely, after the worst inflation surge in a generation, but it is not
inevitable. The financial market volatility of early August was a reminder of the fragilities
and uncertainties in the system.

For these reasons, central banks are approaching the endgame with caution. Turning to
South Africa, output was marginally below our expectations for the first half of the year.
We expect improvements in the second half, with growth of 0.6% in both quarters. This
reflects rising confidence, in part due to a stable electricity supply. We also expect extra
spending given withdrawals from the new Two-Pot retirement system, although some of
these funds will be absorbed by debt repayments and tax.

For the medium term, our growth projections have once again edged higher. The upgraded
forecast is premised on better-functioning network industries, especially electricity,
alongside broader reform momentum. Because potential growth is higher, in the forecast,
supply and demand remain broadly balanced, even as growth accelerates. The pace of
growth nonetheless remains below longer-run averages, of around 2%. A particular concern
is investment, which has been contracting for four consecutive quarters. A stronger
investment performance is a pre-requisite for sustained higher growth, and although we
continue to expect an investment recovery, its scale and speed will be a key indicator of
South Africa’s longer-run economic prospects. The risks to the growth outlook are assessed
as balanced.

Moving to inflation, headline eased to 4.4% in August, a 3-year low, and close to the
middle of our target range. Our forecast suggests this progress will be sustained, with
inflation contained below the 4.5% midpoint of our range through to the end of the forecast
horizon, in 2026.

In the near term, we continue to see a dip in headline inflation, supported by the stronger
exchange rate and lower oil prices. The implied starting point of the rand is R18.04 to the
US dollar, an appreciation of nearly 2% relative to our July assumption. This contributes to
fuel price deflation, which helps keep headline below 4% through the first half of next year.
As usual, we will look through this near-term supply shock, focusing on the medium-term
outlook.

Lower headline inflation also reflects a better food price outlook, with inflation for this
category below the midpoint through 2025 and 2026. However, these benefits are partly
offset by higher electricity prices, with an expected inflation rate more than double that of
headline.

For core inflation, we expect the trajectory to be slightly below 4.5% over the medium
term. Again, this is primarily due to the exchange rate, which affects core mainly through
import prices.

Services inflation, meanwhile, is expected to stabilise near the midpoint early next year,
after a stretch of prints above 4.5%. This partly reflects subdued housing inflation, which
has accelerated less than expected this year. Lower inflation expectations also contribute to
the improved services outlook.

According to the latest survey, these expectations are still in the top half of the target range,
at 4.8% for both 2025 and 2026. They are nonetheless moving – slowly – in the right
direction. As long as headline inflation stabilises at lower levels, we anticipate further
progress in re-anchoring expectations around the middle of our target range.

The risks to inflation are assessed as balanced. Against this backdrop, the MPC decided to
reduce the policy rate by 25 basis points, to 8% per annum, with effect from 20
[Link] discussing the stance, MPC members considered an unchanged stance, a 25-
basis point cut, and a 50-basis point cut. The MPC ultimately reached consensus on 25
basis points, agreeing that a less restrictive stance was consistent with sustainably lower
inflation over the medium term.

The forecast sees rates moving towards neutral next year, stabilising slightly above 7%. As
before, the rate path from the Quarterly Projection Model remains a broad policy guide,
changing from meeting to meeting. Decisions of the MPC will continue to be data
dependent, and sensitive to the balance of risks to the outlook.

There are scenarios where inflation could undershoot the baseline forecast, if oil prices are
lower or the exchange rate appreciates further. Conversely, inflation could be higher than
our baseline forecast given scenarios such as higher housing costs, larger electricity price
increases, or wage increases that outrun inflation and productivity growth. Meanwhile, food
inflation is a source of uncertainty, despite recent improvements.

Global conditions pose additional challenges. Geopolitical risks are heightened and could
generate further economic shocks. Policy uncertainty is also elevated, in various parts of
the world. Both trade restrictions and debt levels are rising, and might go much higher. This
mix could add significant inflationary pressure to the world economy, generating tighter
financial conditions for South Africa and other countries.

For the time being, South African assets have performed relatively well. The rand has
strengthened during the year, more than most peer currencies, while long-term yields have
moderated and spreads over US rates have narrowed. These moves have reversed some of
the deterioration experienced since 2020.

Given a potentially adverse external environment, however, it is crucial to sustain domestic

reform momentum. This entails both structural reforms to support growth capacity, and
macroeconomic efforts to rebuild fiscal and monetary buffers.
The MPC’s main contribution is to deliver low and stable inflation, with well-anchored
inflation expectations.

We also recommend additional measures that would improve economic conditions. These
include reaching a prudent public debt level, further repairing and strengthening network
industries, lowering administered price inflation, and keeping real wage growth in line with
productivity gains.

Source: South African Reserve Bank. 2024. Statement of the Monetary Policy Committee Issued by Lesetja Kganyago, Governor of the South African Reserve Bank. [Online] Available
at: [Link] [A
ccessed: 22/09/2024

Based on the Statement of the Monetary Policy Committee

scenario, answer the following questions:

1.1 Analyse how the South African Reserve Bank’s recent

monetary policy decision addresses the macroeconomic goal of
maintaining low levels of inflation. In your answer, discuss the
current inflation trends, the bank’s inflation target, and the
potential risks to the inflation outlook.

(8 Marks)

1.2 Evaluate the effectiveness of the South African Reserve

Bank’s monetary policy in promoting stable and sustainable
economic growth. Consider the current growth projections, factors
influencing growth, and the potential impact of the recent interest
rate cut on economic activity.

(7 Marks)

1.3 Using a graph, illustrate the relationship between interest

rates, inflation, and economic growth as described in the
scenario. Your graph should show:

a. The current policy rate

b. The inflation target range
c. The expected trajectory of inflation
d. The projected economic growth rate
Explain how your graph demonstrates the bank’s attempt to
balance low inflation with economic growth.

(10 Marks)

1.4 Synthesise the information provided in the scenario to explain

how the South African Reserve Bank balances the three main
macroeconomic objectives (stable and sustainable economic
growth, low levels of inflation, and low rates of unemployment) in
its policy-making process. Identify any potential trade-offs or
conflicts between these objectives and suggest how the bank
might prioritise them.

(5 Marks)

Question 2

Study the scenario and complete the question that follows:

Economica

The economy of Economica has been experiencing steady

growth. Recently, the government announced a major
infrastructure project, investing 2 billion Economica dollars (E$)
in new roads and bridges. Economists predict this will have a
significant positive impact on the economy. However, shortly
after the announcement, global oil prices unexpectedly rose,
causing an increase in the overall price level in Economica.

Source: Chabara, T. (2024)

Using a single graph, illustrate the following economic scenarios

for Economica:

 The initial equilibrium in the economy before the

government’s investment announcement
 The effect of the E$2 billion infrastructure investment on
aggregate planned expenditure
  The new equilibrium point after the investment increase,
assuming no other changes
 The impact of the unexpected rise in oil prices on aggregate
planned expenditure
 The final equilibrium point after both the investment
increase and the price level increase

Your graph should include:

 Properly labeled axes (Aggregate planned expenditure on

the vertical axis and Real GDP on the horizontal axis)
 At least three aggregate expenditure curves (Initial AE, AE
after investment, AE after price increase)
 A 45° line
 Clear indication of the three equilibrium points (initial, after
investment, final)
 Appropriate labeling of key points and shifts
 A legend explaining any symbols or colors used

Ensure your graph clearly shows how the multiplier effect

amplifies the initial investment’s impact on Real GDP, and how
the subsequent price level increase partially offsets this
expansion.

(10 Marks)

Question 3

Study the scenario and complete the questions that follow:

Economic Growth

South Africa’s real GDP was R3 152 billion in 2022 and R3 230
billion in 2023 (measured in constant 2015 prices). South
Africa’s population was estimated at 60.6 million in 2022 and
61.3 million in 2023.

Source: Chabara, T. (2024).

Calculate:

3.1 The economic growth rate

(3 Marks)

3.2 The growth rate of real GDP per person

(5 Marks)

3.3 The approximate number of years it would take for real GDP
per person in South Africa to double if the 2023 economic growth
rate and population growth rate are maintained

(2 Marks)

Question 4

Study the scenario and complete the questions that follow:

Turtle Island

The figure illustrates the components of aggregate planned

expenditure on Turtle Island. Turtle Island has no imports or
exports, no incomes taxes and the price level is fixed.
4.1 Calculate autonomous expenditure and the marginal
propensity to consume.

(3 Marks)

4.2 What is aggregate planned expenditure when real GDP is

$6 billion?

(1 Mark)

4.3 If real GDP is $4 billion, what is happening to inventories?

(3 Marks)

4.4 If real GDP is $6 billion, what is happening to inventories?

(3 Marks)

Question 5 10 Marks
Study the scenario and complete the questions that follow:

Rainbow Nation Republic

The national accounts of the Rainbow Nation Republic are

maintained by Stats SA. Due to a severe power outage caused
by loadshedding, some of the digital records were corrupted.
The accounts are now incomplete but contain the following data:

Item Value (in millions of

Rand)
GDP (income approach) R2 900 000
Consumption expenditure R2 000 000
VAT and other indirect taxes less R100 000
subsidies
Net operating surplus R500 000
Gross fixed capital formation R800 000
(Investment)
Government expenditure R400 000
Compensation of employees R2 000 000
(Wages)
Net exports −R200 000
Source: Chabara, T. (2024)

Use the data in the scenario to answer the following questions:

5.1 Calculate GDP using the expenditure approach and determine

the value of depreciation.

(6 Marks)

5.2 Calculate net domestic income at factor cost and the

statistical discrepancy.

(4 Marks)

Question 6

Study the table and answer the questions that follow:

 The Agricultural Output of South Africa

The table provides data on the agricultural output of South Africa, focusing on its major
crops of maize and citrus fruits.

2022 (tonnes)
Product 2023 (tonnes)

Maize 15 000 16 500

Citrus 2 500 2 750

Product 2022 (R per tonne) 2023 (R per tonne)

Maize 3.5 4.2

Citrus 8 7.5

Source: Chabara, T. (2024)

Use the data in the scenario to answer the following questions:

6.1 Calculate South Africa’s nominal agricultural GDP for maize and citrus in 2022 and
2023.

(5 Marks)

6.2 Calculate South Africa’s real agricultural GDP for maize and citrus in 2023, using 2022
as the base year.

(5 Marks)