CASE STUDY

Demand management can be used by both fiscal policy and monetary policy. Read the extract below in order to answer the questions that follow.

South Africa: Staff Concluding Statement of the 2019 Article IV Mission PersistentChallenges

South Africa's undeniable economic potential remains largely untapped and the recent economic performance points to rising risks. The economy faces three immediate challenges:

Persistently weak economic growth. Subdued growth is largely attributable to stagnant private investment and exports, and declining productivity, mainly due to the slow pace ofreform to address weaknesses in the business climate, including regulatory constraints, labour market rigidities and inefficient infrastructure. Unreliable electricity supply has exacerbated the growth constraints. Small and medium-sized enterprises (SMEs) areespecially disadvantaged in this environment.

Deteriorating fiscal and government debt.Weak revenue and increased current expenditure have worsened the budget composition and raised deficits and borrowingrequirements, undermining the sustainability of public finances. This fiscal trajectory has also lifted financing costs across the economy.

Major difficulties in the operations of state-owned enterprises (SOEs).Inefficiencies in SOEs operating in network industries, such as electricity and transport, translate into costly inputs for businesses and repeatedly require financial support from the fiscus.

In sum, the reliance on government spending to boost growth has not delivered the anticipated results, as the supply-side nature of the growth constraints has not been addressed. Moreover, government financing of SOE current spending is not growth-enhancing and has increaseddebt service costs that are now the fastest-growing expenditure item, crowding out other forms of public spending. Thus, the economy has been left with high and rising debt, low growth and limited fiscal space to respond to shocks.

Source:International Monetary Fund(2019)

6.1. With reference to the extract, do you think that fiscal policy should partake in expansionary instrument employment? Substantiate your answer with reference to thetext provided. (2)

6.2. Indicate and explain an appropriate monetary policy instrument that can be used tostimulate growth. (2)

6.3. Use the AD-AS model to illustrate what impact an expansionary monetary policyinstrument (as indicated in 6.2) will have on the general price level and the level of real production and income in the economy. (6)