3 Macro-economic environment & its impact on asset classes

Question 1

What is the balance of payments?

Answer 1

A record of a country’s trade transactions with other countries

Question 2

In the balance of payments, what are receipts and payments?

Answer 2

Receipt = sterling flowing into the UK / other currencies converting to sterling
Payment = sterling flowing out of the UK / sterling converting to other currencies

Question 3

What are the components of the balance of payments?

Answer 3

1. The current account
2. The capital account

Question 4

What does the current account cover?

Answer 4

Import & export of goods (visible trade) and services (invisible trade)

Question 5

What causes a deficit in the balance of payments current account?

Answer 5

More goods & services are imported than exported

Question 6

What causes a surplus in the balance of payments current account?

Answer 6

More goods & services are exported than imported

Question 7

What does the capital account cover?

Answer 7

Incoming & outgoing investments & loans

Question 8

What happens if you have a persistent trade gap?

Answer 8

Your currency is depressed to make your exports more competitive

Question 9

What causes a capital account surplus?

Answer 9

More foreign investors invest in the UK

Question 10

What causes a capital account deficit?

Answer 10

More UK investors invest overseas

Question 11

What happens if there is a net deficit in the balance of payments?

Answer 11

Official reserves (foreign currencies owned by Bank of England) must be used to finance it

Question 12

What is disinflation?

Answer 12

A decrease in the rate of inflation

Question 13

What is deflation?

Answer 13

Negative inflation

Question 14

What is stagflation?

Answer 14

Stagnant growth (weak business performance + unemployment) + inflation

Question 15

What is money supply?

Answer 15

The quantity of money available in the economy to purchase goods & services

Question 16

What does money supply indicate?

Answer 16

Strength of consumer demand

Question 17

Rising interest rates lead to __ money supply

Answer 17

Falling

Question 18

Falling interest rates lead to __ money supply

Answer 18

Increasing

Question 19

Why do interest rates affect money supply?

Answer 19

Higher rate = less borrowing = less money

Question 20

What are the most commonly quoted measures of money supply?

Answer 20

M0 (narrow money)
M4 (broad money)

Question 21

What does a growth in M0 indicate?

Answer 21

Consumer spending is buoyant

Question 22

What does a growth in M4 indicate?

Answer 22

1. Increased demand for loans
2. Inflationary pressures

Question 23

How can the Bank of England increase money supply?

Answer 23

Create money to purchase securities -> lower interest rates

Question 24

How can the Bank of England decrease money supply?

Answer 24

Sell Treasury bills -> higher interest rates