Question

contemporary economic issues 40 marks = 30 minutes
answer the following questions.
1.1 give any two examples of goods that are excluded when calculating core inflation. (2 x 1)
1.2 how does air - pollution affect the environment? (1 x 2)
study the cartoon below and answer the questions that follow.
inflation
the south african reserve bank (sarb) is a member of the international monetary fund (imf) which works closely with the world bank to promote global financial stability and economic growth.
2.1 identify in the cartoon and information above the institution that determines the interest rates.
2.2 name the monetary policy instrument that relates to the selling of government bonds.
2.3 briefly describe the term administered - price inflation.
2.4 explain the benefit of a general price increase (or deflation) in the economy.
2.5 how would an oversupply of money impact on the economy? (2 x 2)

Explanation:

1.1. When calculating core inflation, volatile items like food and energy are often excluded as their prices can fluctuate greatly due to seasonal or short - term factors and may distort the overall inflation picture. For example, fresh fruits and vegetables (due to seasonal availability) and gasoline (due to geopolitical events affecting oil prices) are common exclusions.
1.2. Air pollution can have multiple environmental impacts. It can damage plants by harming their leaves and reducing photosynthesis, leading to decreased crop yields and forest health. It also affects water bodies by depositing pollutants that can change the chemical composition of water, harming aquatic life.
2.1. The South African Reserve Bank (SARB) is the institution that determines the interest rate as it is the central bank responsible for monetary policy in South Africa.
2.2. Open - market operations, specifically the selling of government bonds, is a monetary policy instrument. When the central bank sells government bonds, it reduces the money supply in the economy as people use their money to buy the bonds.
2.3. Administered - price inflation refers to inflation caused by prices that are set by government or large firms with significant market power, rather than by market forces of supply and demand. For example, regulated utility prices or prices set by state - owned enterprises.
2.4. A general price increase (inflation) can have some benefits. It can encourage spending in the short - term as consumers may buy now to avoid higher future prices, which can boost economic activity. It also allows for easier debt repayment in real terms for borrowers if wages increase with inflation.
2.5. An oversupply of money can lead to inflation. With more money in circulation, there is more demand for goods and services. If the supply of goods and services does not increase proportionally, prices will rise. It can also lead to a devaluation of the currency in the foreign exchange market as there is an increased supply of the currency.

Answer:

1.1. Examples: Fresh fruits and vegetables, gasoline.
1.2. Damages plants, affects water bodies and aquatic life.
2.1. South African Reserve Bank (SARB).
2.2. Open - market operations (selling government bonds).
2.3. Inflation caused by prices set by government or large firms with market power, e.g., regulated utility prices.
2.4. Encourages short - term spending, eases debt repayment in real terms for borrowers.
2.5. Leads to inflation and currency devaluation.