ZIMSEC A Level · Economics · Form 6
Money and banking
Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment. Commercial banks create credit; the Reserve Bank of Zimbabwe (RBZ) is the central bank, issuing currency (including the ZiG introduced in 2024), setting monetary policy, supervising banks and managing reserves.
Inflation
A sustained rise in the general price level, measured by a consumer price index (CPI) computed by ZIMSTAT.
- Demand-pull inflation: excess aggregate demand.
- Cost-push inflation: rising costs (fuel, wages, imported inputs, currency depreciation).
- Monetary causes: excessive growth of the money supply (quantity theory: MV = PT). Zimbabwe experienced hyperinflation in 2007–2008.
- Effects: erodes savings and fixed incomes, uncertainty, menu and shoe-leather costs, loss of international competitiveness, redistribution from lenders to borrowers.
- Deflation: falling prices, which can depress spending and investment.
Worked example: A price index rises from 150 to 162 in a year. Find the inflation rate.
(162 − 150) ÷ 150 × 100 = 8%
Monetary policy
Changes in interest rates, money supply and credit controls. Higher interest rates reduce borrowing and spending, curbing inflation but slowing growth. Exchange-rate policy also influences import prices.
Check yourself
- Distinguish between demand-pull and cost-push inflation.
- State two functions of the Reserve Bank of Zimbabwe.
- How does raising interest rates reduce inflation?
Show answers
- Demand-pull is caused by excess demand; cost-push by rising production costs.
- Any two: issues currency, monetary policy, banker to government and banks, supervises banks, manages reserves.
- Borrowing becomes more expensive and saving more attractive, so spending and AD fall.
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