Monetary Policy Committee Statement, Trade Unions, Globalization, and Price Elasticity of Demand

Read the following extracts from the statement of the monetary policy committee and answer questions.

19 March 2020: Statement Of The Monetary Policy Committee

Issued by Lesetja Kganyago, Governor of the South African Reserve Bank

Since the January meeting of the Monetary Policy Committee (MPC), the Bank’s forecast for inflation has continued to moderate, in line with monthly inflation data and recent lower oil prices. Globally, a once-healthy economic growth outlook has been revised down sharply due to the outbreak and spread of Covid-19. This coronavirus will negatively affect global and domestic economic growth through the first half of 2020, and potentially longer depending on steps taken to limit its spread.

The domestic economic outlook remains fragile. At this point, Covid-19 is likely to result in

weaker demand for exports and domestic goods and services, but its impact on the economy could be partly offset by lower oil prices. We also expect disruptions to supply chains and to normal business operations. The Bank now expects the economy to contract by 0.2% in 2020. GDP growth is expected to rise to 1.0% in 2021 and to 1.6% in 2022.

With persistently low inflation, and the coronavirus now hitting economic activity, monetary policy in major advanced economies and China will likely remain accommodative over the medium term.

Electricity pricing remains an immediate concern, and there is likely to be higher volatility in

prices of other goods and services as a result of sharp changes in demand and supply. Risks to inflation from recent currency depreciation are expected to be muted as pass through is slow and could be offset by a wider output gap. Food price inflation is expected to remain low, in part due to better weather conditions.

Despite the general rise in risk, the significantly lower forecast for headline inflation has created space for monetary policy to respond to the rapid deterioration in economic conditions. Barring severe and persistent currency and oil shocks, inflation is expected to be well contained, remaining below the midpoint of the target in 2020 and close to the midpoint in 2021. Against this backdrop, the MPC decided to cut the repo rate by 100 basis points. This takes the repo rate to 5.25% per annum, with effect from 20 March 2020. The decision was unanimous.

1.The statement of the monetary policy committee makes reference to lower oil prices. Critically discuss the reason/s for the sharp decrease in oil prices. Use a graph to support your discussion. (10)

2.As an advisor to OPEC (Organisation of the Petroleum Exporting Countries), advise the group on how to boost crashing oil prices and therefore to stabilise the oil market. Use a graph to support your discussion. (10)

3.In the context of the MPC statement, critically argue whether South Africa should pursue expansionary or contractionary monetary policy. In support of your answer, provide an overview of South Africa’s current monetary policy (i.e. instruments of monetary policy). (10)

4.The MPC statement places considerable emphasis on inflation. Discuss South Africa’s anti-inflation policy and critically assess the causes and effects of inflation. 

A vast majority of South Africa’s population in the labour market earn low wages, resulting in

widespread poverty. The role of trade unions in increasing wage rates is often a point of debate. In particular, it is argued that the actions of trade unions can cause unemployment.

In light of the above, explain with the use of graphs, three ways in which trade unions can attempt to increase the wage rate. In each case, be sure to explain the effect on the level of employment.

Not all countries and regions benefit from globalisation to the same extent. Although there are several benefits of globalisation, such as new business and employment opportunities, the integration of the world economy also leads to questionable and illegal activities. In particular, some activities can be perceived as being legal but not ethical, while other activities are illicit. Such activities have an impact on the economic development of a country. 

Against this context, critically discuss the negative aspects of globalisation.

As an economic advisor to a local business you have been requested to comment on the price elasticity of demand for a particular product. You are required to:

1.Calculate the price elasticity of demand using the point method. The graph below provides detail on the quantity demanded of this particular product at various price levels. Assume the movement is from point A to point B;

2.Interpret your answer on the price elasticity of demand; and

3.Advise the firm on the impact that the change in price has on total revenue (show all your calculations).