CAMPUS NAME: UNKNOWN

PROGRAMM: BACHELOR OF COMMERCE IN ACCOUNTING

INDIVIDUAL ASSIGNMENT
MODULE: ECONOMICS 1
NAME: UNKNOWN
STUDENT NUMBER: UNKNOWN
 TABLE OF CONTENTS
Introduction…………………………………………………………………………………
Relationship between Inflation and purchasing power…………………………………
Why Inflation makes people save or borrow money……………………………………
How the South African government manages Inflation………………………………..
What determines the value of a currency……………………………………………….
Why the Pound fell at the end of 2009………………………………………………….
Possible effects on the South African economy of a fall in the value of the currency..
Low economic growth……………………………………………………………………….
Reasonable level of exports relative to imports…………………………………………
Low unemployment………………………………………………………………………….
In economics, inflation is the general rise in the prices of an economy over a period of
time and when the general price level rises, each unit of currency buys fewer goods and
services. Consequently, inflation reflects a fall in the purchasing power per unit of
money. The following assignment will discuss more on the relationship between the
purchasing power and inflation. It will also discuss on whether inflation is good for
saving or borrowing money, how the South African government manages inflation. Apart
from these topics, the assignment will also talk about the determinants of currency
value, why the Pound fell in 2009, what would happen to the South African economy if
the Rand fell, why low economic growth might be desirable for the economy, why low
unemployment rate might be good for the economy, and the reasonable level of exports
relative to imports.

Question 1.1

Relationship between inflation and purchasing power

Inflation refers to the general increase in prices or the cost of living over a given period
of time of a country and purchasing power is when the value of a currency is expressed
in terms of goods or services that a unit of money can buy
(https://www.investopedia.com/terms/p/purchasingpower.asp).
Inflation and purchasing power are somewhat related in a sense that the value of
purchasing power is reduced by the inflation of a currency which causes the prices to
rise (https://www.studocu.com/en-za/document/damelin/economics/the-relation-
between-inflation-and-purchasing-power/17133138).
Purchasing power is also important in a way that all else being equal, Inflation
decreases the number of goods or services one would be able to purchase.

Question 1.2

Why Inflation makes one save or borrow money

As discussed before, inflation occurs when there is a general increase in the price of
goods and services and a fall in purchasing power.
As moderate inflation is regarded as a good thing since it is associated with economic
growth, the prices of house hold goods and services increase
(https://www.moneyweb.co.za/financial-advisor-views/what-does-inflation-do-to-your-
investments/). It makes the servicing debts easier, effectively transferring wealth from
creditors to debtors.
It is better to borrow than save money considering that because of inflation, the money
one has to pay back will be worth less than the money borrowed because of the fall of
the purchasing power.
Question 1.3

How the South African government manages Inflation

Inflation targeting was formally introduced in South Africa in February of 2000 and with
this concept, the central bank uses monetary policy tools, especially the control of short
term interest rates, to keep inflation in line with a given target
(https://www.resbank.co.za/en/home/what-we-do/monetary-policy).
The South African government manages the inflation by keeping the consumer price
inflation between 3% and 6% which in return protects the currency against the domestic
consumer prices.
The inflation targeting approach has been more successful than any other frameworks
that SARB have used before in a sense that it has allowed a more realistic alignment
between the SARB’s tools and objectives, and has also enhanced transparency and
accountability by giving the SARB a clear and publicly visible objective.
“The SARB fulfils its constitutional mandate to protect the value of the rand by keeping
Inflation low and steady”
(https://www.resbank.co.za/en/home/what-we-do/monetary-policy).

Question 2.1

What determines the value of a currency?

The value of currency is determined by the supply and demand both domestic and
foreign (https://bizfluent.com/facts-4987763-what-determines-value-currency.html). The
value of currency appreciates when there is an increase in demand and it depreciates
when there is an increase in supply. Some of the factors that may affect currency value
are:
a. Interest rates
 An interest rate is the amount that it cost to borrow money. The interest
rate is usually raised or lowered by a country’s central bank to either
stimulate or slow down the economy, and high interest rates impose a
more costly fee to borrow money while low interest rates lessen the fee
(https://mint.intuit.com/blog/personal-finance/value-of-your-money/).
 The currency of a country that is offering high interest rates will increase in
value or be equal because the fixed income investors prefers higher
interest rates, which increase the currency’s demand and value
(https://corporatefinanceinstitute.com/resources/knowledge/economics/
how-is-currency-valued/).
 b. Inflation
 The rate of inflation in a country can have a major impact on the value of
the country’s currency and the rates of foreign exchange it has with the
currencies of other nations
(https://www.investopedia.com/ask/answers/022415/how-does-inflation-
affect-exchange-rate-between-two-nations.asp).
 High inflation decreases the purchasing power of the currency holder and
increases the cost of local goods. The countries that experience high
inflation experiences a decrease in currency demand, and therefore a
depreciation in currency value
(https://corporatefinanceinstitute.com/resources/knowledge/economics/
how-is-currency-valued/).

c. Capital flow
 The capital flow represents a large portion of the demand for currency.
When there is a large amount of capital inflow going into a country, the
currency appreciates and when there is capital outflow, the currency
depreciates
(https://corporatefinanceinstitute.com/resources/knowledge/economics/
how-is-currency-valued/).

Question 2.2

The reason why the pound fell so low toward the end of 2009

Relatively, a currency can devalue when the foreign exchange value of one currency
drops against the exchange value of other currencies
(https://www.investopedia.com/ask/answers/060115/what-are-key-economic-factors-
can-cause-currency-depreciation-country.asp).
One of the reasons why the pound fell so low might be because of recession.
Recession happens when there is a decline in a country’s GDP in two consecutive
quarters (https://www.standard.co.uk/business/what-recession-uk-economy-
a4522561.html).
In 2008, the UK recorded its worst recession in history as at the time the economy
marked up five quarters of contraction, peaking at negative two point two percent in
quarter 4 2008.
The deepest post-war recession made way for huge institutions to fold and others being
rescued by the taxpayers in a global downturn that was sparked by the US subprime
mortgage crisis (https://www.standard.co.uk/business/what-recession-uk-economy-
a4522561.html).
Question 2.3

Possible effects on the South African economy if the value of

currency falls

Because of the downward pressure on the value of a currency, without exception, the
interest rates rises and the bond values lowers. So as the rand depreciates, the margins
spread and the volatility rises and these factors give rise to pressure on the interest
derivatives and bond markets which leads to a loss
(https://www.justice.gov.za/commissions/comm_rand/rand_final_report/part_h.pdf).
When the Rand continues to devalue, there is a high risk of entrenching South Africa as
a country with substantial export share but one which still has a low GDP with a high
unemployment rate (https://www.property24.com/articles/impact-of-sas-rand-
depreciation/172290.
The inflation rate would rise if South Africa continues to pursue a weaker Rand, which in
turn would result in workers being trapped with lesser wages as their purchasing power
would diminish.
Workers that are under considerable Rand depreciation are cut down to face producing
relatively cheap products and earn low salaries as a result of substantial currency
depreciation (https://www.property24.com/articles/impact-of-sas-rand-depreciation/
17229). Without the ability to tap into economies of scale as the cost of regulation of the
production process is beyond the country’s reach because of the severe weakness of
the currency.
A country’s standard of living is shaped by its output, the more it produces through the
use of its resources, whether these are human, natural or capital the more there is to go
around so long as the gains are not worn out by inflation.
If South Africa tries to follow the path of depreciating the currency immensely, there
would be a great social unrest and political instability. A considerate depreciated
currency is easy to achieve, but the reversal of the unplanned consequences of such
depreciation are not easy to reverse (https://www.property24.com/articles/impact-of-
sas-rand-depreciation/17229).

Question 3.1

The reason why low economic growth might be desirable for an

economy

With low growth rates, the inflation pressures of an economy lowers. This means that
the Central Banks can keep interest rates lower, which is good for borrowers, mortgage
holders and the government selling bonds
(https://www.economicshelp.org/blog/149782/economics/effects-of-slower-economic-
growth/).
The low rates of economic growth and the low rate of increasing national output also
makes it easier to meet targets for reducing carbon emissions for the environment.
When the economic growth is high, the pressure to produce quick and cheap energy is
also high which in turn leads to burning fossil fuels. On the other hand, low rates of
economic growth give more chance to shift renewable energy
(https://www.economicshelp.org/blog/149782/economics/effects-of-slower-economic-
growth/).

Question 3.2

Reasonable level of exports relative to imports being desirable for an

economy

When both the exports and imports of a country experiences growth, then that means
that the economy of that particular country is healthy. This initially indicates the
economic strength and a sustainable trade surplus deficit
(https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-
and-exports.asp).
When the exports grow while the imports decline, it shows that the foreign economies
are in better shape than the domestic economy and vice versa.

Question 3.3

Low unemployment being desirable for an economy

When there is low unemployment, the government and taxpayers have less strain and
they do not have to support a large population of people out of work.
When more people work, the government has less burden to put money into welfare
programs and with more people working, the government gets to bring in more tax
revenue (https://careertrend.com/about-7393470-low-unemployment-rate-good-.html).
The above have discussed more on the relationship between the purchasing power and
inflation. It has also discussed on whether inflation is good for saving or borrowing
money, how the South African government manages inflation. Apart from these topics,
the assignment have also talked about what determines of currency value (interest
rates, inflation, and capital flow), why the Pound fell in 2009, what would happen to the
South African economy if the Rand fell, why low economic growth might be desirable for
the economy, why low unemployment rate might be good for the economy, and the
reasonable level of exports relative to imports.
 BIBLIOGRAPHY

https://www.investopedia.com/terms/p/purchasingpower.asp
https://www.studocu.com/en-za/document/damelin/economics/the-relation-between-
inflation-and-purchasing-power/17133138
https://www.moneyweb.co.za/financial-advisor-views/what-does-inflation-do-to-your-
investments/
https://www.resbank.co.za/en/home/what-we-do/monetary-policy
https://bizfluent.com/facts-4987763-what-determines-value-currency.html
https://mint.intuit.com/blog/personal-finance/value-of-your-money/
https://corporatefinanceinstitute.com/resources/knowledge/economics/how-is-currency-
valued/
https://www.investopedia.com/ask/answers/022415/how-does-inflation-affect-exchange-
rate-between-two-nations.asp
https://www.investopedia.com/ask/answers/060115/what-are-key-economic-factors-can-
cause-currency-depreciation-country.asp
https://www.standard.co.uk/business/what-recession-uk-economy-a4522561.htm/
https://www.justice.gov.za/commissions/comm_rand/rand_final_report/part_h.pdf
https://www.property24.com/articles/impact-of-sas-rand-depreciation/17229
https://www.economicshelp.org/blog/149782/economics/effects-of-slower-economic-
growth/
https://www.investopedia.com/articles/investing/100813/interesting-facts-about-imports-
https://careertrend.com/about-7393470-low-unemployment-rate-good-.html and-
exports.asp