Answer question 1.4 by circling the correct option. Each Beantwoord vraag 1.4 de
ID: 1140817 • Letter: A
Question
Answer question 1.4 by circling the correct option. Each Beantwoord vraag 1.4 deur die korrekte opsie te omkring. Elke antwoord tel een answerisTmaiR. 1.4 Which of the following is correct regarding the effect of a change in repo rate on exchange rate transmission mechanism Watter van die volgende is korrek aangaande die uitwerking van'n verandering i op uitset waar die wisselkoers-transmissiemeganisme gebruik word: When the repo rate increases: All interest rates will increase decrease stay the same The inflow of capital into the country will ncrease (ii) decrease stay the same (ii) This is because the prices of domestic stocks and securities decrease increase stay the same (iv) This causes the rand to appreciate depreciate remain unchanged (v) Foreign goods are now relatively (vi) Thus net export:s (vii) Equity prices will (vii) Bank deposits will (ix) Aggregate output will more expensive less expensive not affected increase decrease stay the same increase decrease not be affected increase decrease not be affected increase decrease stay the sameExplanation / Answer
When repo rate increases, banks have to pay higher interest rate to Central Bank for the loans they took from Central bank. Therefore,
(i) All interest rate will increase.
(ii) Inflow of capital will increase.
(iii) This is because prices of domestic stocks decrease (since stock price & interest rate are inversely related).
(iv) This causes the rand (domestic currency) to appreciate (since demand for rand will increase due to higher foreign investment made in the country).
(v) Foreign goods are now relatively less expensive.
(vi) Net exports decrease (since imports will rise and exports will fall).
(vii) Equity prices will decrease.
(viii) Bank deposits will increase (since global investors will be attracted by higher interest rate)
(ix) Aggregate output will decrease (since net exports decrease).