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ECS 3701 MONETARY ECONOMICS ASSIGNMENT 2 SEMESTER 2 2022
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ECS3701MONETARY ECONOMIVCS
ASSIGNMENT 02
2022 SECOND SEMEMSTER
DUE DATE: FRIDAY 30 SEPTEMBER 2022
Whatsapp Ranga: 0618441387 for tutorials, assignments and
exam assistance/ coaching
2.01.
Both private investors and financial intermediaries would benefit from risk sharing. Financial
institutions help reduce the exposure of investors to risk that is, uncertainty about the returns
investors will earn on assets. Financial intermediaries do this through the process known as
risk sharing; they create and sell assets with risk characteristics that people are comfortable
with, and the intermediaries then use the funds they acquire by selling these assets to
purchase other assets that may have far more risk.
Low transaction costs allow financial intermediaries to share risk at low cost, enabling them
to earn a profit on the spread between the returns they earn on risky assets and the payments
they make on the assets they have sold. This process of risk sharing is also sometimes
referred to as asset transformation, because in a sense, risky assets are turned into safer assets
for investors. Financial intermediaries also promote risk sharing by helping individuals to
diversify and thereby lower the amount of risk to which they are exposed. Diversification
, entails investing in a collection (portfolio) of assets whose returns do not always move
together; with the result that overall risk is lower than for individual assets.
2.02.
Inflation refers to a persistent increase in the general price level. It is a macro-economic
phenomenon. According to Stats SA, the South African annual consumer price inflation was
7.8% in July 2022 from 7.4% in June 2022.
This study by Madito and Odhiambo (2018) investigated the causes of inflation in South
Africa using quarterly data from 1970Q1 to 2015Q4. The study was motivated by recent
trends in domestic inflation that has frequently been at the upper end of the target range of
between 3% and 6%, and the need to guide inflation-related policy since 2008. Using Error
Correction Model (ECM) modelling techniques, empirical results revealed that inflation
expectations, labour costs, government expenditure and import prices are the main causes of
inflation, while GDP and exchange rates are negative determinants of inflation. To achieve
the macroeconomic policy objective of a stable and low inflation rate for South Africa, more
emphasis should be placed on anchoring inflation expectations, which was found to be highly
significant in determining inflation.
Other studies (Fedderke and Liu, 2018; Meyer, 2018) found that inflation is being driven
mostly by cost-pushes. This occurs when there is an increase in prices due to an increase in
material and wages, these costs are normally passed down to consumers in a form of higher
prices for goods and services. For example, energy, is a component in most goods and
services and when the price of energy rises, producers will need to pass on the cost to
consumers. In South Africa we can clearly observed this cost-push when the fuel price went
up causing the cost of most foods (e.g., meat and bread) and transport services (e.g., taxi fare)
to increase.
Hussein (2017) attributed South Africa’s inflation to demand-pull causes. Rising wages,
lower interest rates, and increase in export demand were cited as the chief culprit for rising
inflation in South Africa. This was exacerbated by an increase in government expenditure
that that has the South African government running perennial budget deficit. The economy’s
ability to meet the country’s demand seems less than the demand for goods and services,
causing an upward pressure on prices.
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