3 - Economic environment

Question 1

What is leakages in circular flow

Answer 1

Imports, Savings tax

Question 2

What is injection in circular flow

Answer 2

Investment, Gov spending, Exports

Question 3

What are the phases of economic cycle

Answer 3

1. Recovery
2. Boom
3. Slowdown
4. Recession

Question 4

What is the difference between gov expenditure and revenue receipt called

Answer 4

Public sector net cash requirement

Question 5

What is the purchasing managers index

Answer 5

A economic indicator from Chartered institute of procurement and supply CIPS.

Question 6

What are key economic indicators

Answer 6

Earnings Growth
GDP
CPI
PPI
PMI
Unemployment rate

Question 7

What does BOP consist of

Answer 7

Current Account
Capital and financial account

Question 8

What is capital account and financial account

Answer 8

Deals with foreign investment in UK and UK investment abroad

Capital account -> movement of money for investment (property or financial assets)
Financial accounts -> change in ownership of financial assets between country residents and non-residents

Question 9

What is current account

Answer 9

Import and exports of UK:

Trade in goods
Trade in services
Investment income
Transfer payment

Question 10

What is UK official internation reserves made up of?

Answer 10

Foreign currencies
Gold
IMF, SDRs (Special drawring rights)
UK reserves tranche position at IMF

Question 11

What is narrow money

Answer 11

A measure of money supply:
Consists of notes and coins in circulation, banks operational deposits within BOE
M0 -> Reflects changes in economic cycle but does not cause them - has litttle effect on National output or inflation

Indicator of consumer spending

Question 12

What is broad money

Answer 12

M4
notes and coins in circulation. All instant access and deposit accounts of UK residents (banks)

Include deposits created by banks through lending activites and deposits when people want to save

Acts as economic indicator
Increase in demand for loans = M4 growth

Question 13

What is a key measure related to money supply

Answer 13

Velocity of circulation of money

Question 14

How do CB control money supply

Answer 14

Using repo markets - through OMO

Question 15

How many members does MPC have and how often do they meet a year

Answer 15

9 members
8 times a year

Question 16

What happens if CPI is missed by 1% either side

Answer 16

Governor of bank must write open letter to chancellor explaining reasons

Question 17

What is the effect of interest rate on cash investment

Answer 17

Fluctuate with prevailing rate of IR.
Fall IR -> cash deposit less attractive
Rise IR -> Cash deposit more

Question 18

What is the effect of interest rate on fixed interest securities

Answer 18

Inverse relationship between IR (PRICE OF FIXED INTEREST SECURITIES)

as ir falls fixed interest securities price increase
as ir increase fixed interest securities decrease

Question 19

What is the effect of interest rate on equities

Answer 19

Equities benefit from low IR -> low ir more borrow more profit

Question 20

What are inflation measures in UK

Answer 20

CPI
CPIH
RPI

Question 21

What does CPI consist of

Answer 21

Basked of good - average change month to month in price of consumer goods

Question 22

What does CPIH consist of

Answer 22

CPI + Owners occupiers housing cost and council tax

Question 23

What does RPI consist of

Answer 23

Used for pensions for DB schemes and index-linked guilt

Question 24

What is stagflation

Answer 24

stagnent growth and inflation

Question 25

Wat can government policies affect

Answer 25

IR and currencies
Elections and economic cycles