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monetary policy and its effects on economy
monetary policy impact on economy
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Research proposal: the relationship between the repo rate, disposable income, inflation and in turn economic growth in South Africa
Background:
According to (BusinessDictionary.com, 2014) the repo rate is a rate, otherwise should for Repossession is known to central banks as the discount rate , which a central bank buys back government securities from any commercial bank all relative to the current level of money supply that the central bank wishes to keep. In more simple terms it can be suggested that the repo-rate is the rate that commercial banks have to pay when they borrow funds from the central bank to help perform transactions in their daily transactions. If it is in the central banks best interests to expand money supply to stimulate growth, the repo rate will decrease and if the central bank wants to decrease the supply of money in circulation, the repo rate will increase (BusinessDictionary.com, 2014). To help understand the role that the repo rate plays, one needs to better understand the concepts disposable income and economic growth play seeing as they are indirectly affected by the repo rate.
Disposable income is the ‘net’ income that households can spend on goods and services after deducting savings and taxes (Investopedia, 2009). It can be said that disposable income can be used as an important indicator to assess the direction that the economy is going in, hence economic growth or decline in economic growth. An increase in the disposable income is good for economic stimulation, whilst a decrease would not be complementary for economic growth (Investopedia, 2009).
For the repo rate to affect the outcome of economic growth, it first needs to have a layoff effect on the prime rate and disposable income. According t...
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Tradingeconomics.com. 2014. South Africa Inflation Rate | Actual Data | Forecasts | Calendar. [Online] Available at: http://www.tradingeconomics.com/south-africa/inflation-cpi [Accessed: 3 Apr 2014].
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Transfer payments, which become personal disposable income, must be adjusted to inflation rate in order to increase the level of consumption of the beneficiaries of transfer payments which will cause an increase in aggregate demand to help maintain real GDP and price levels according to the moderate inflation expected. The slight increase in aggregate demand will be less than the change in personal disposable income.
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Discount Rate, it is in fact, the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank 's lending facility, (Board of Governors Federal Reserve System, n d). The financial institutions must borrow funds at this interest to the Federal Reserve System. Fed use this tool to control the supply of money something that will affect the inflation and the overall interest rates.
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In order for any country to survive in comparison to another developed country they must be able to grow and sustain a healthy and flourishing economy. This paper is designed to give a detailed insight of economic growth and the sectors that influence economic growth. Economic growth in a country is essential to the reduction of poverty, without such reduction; poverty would continue to increase therefore economic growth is inevitable. Through economic growth, it is also an aid in the reduction of the unemployment rate and it also helps to reduce the budget deficit of the government. Economic growth can also encourage better living standards for all it is citizens because with economic growth there are improvements in the public sectors, educational and healthcare facilities. Through economic growth social spending can also be increased without an increase of taxes.
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