3.2 - Economic Factors Flashcards
When economic factors are referred to in the context of financial services, it is referring to changes in:
- Interest rates
- Economic activity
- Exchange rates
Interest rates definition
The amount that a financial services provider charges a borrower when it lends money or pays to a saver
What are interest rates described as?
The price of money
In what situation will prices rise?
If consumers are demanding more than businesses are able to supply
What is the result of a widespread increase in price?
Inflation
Inflation definition
A rise in prices, which means that the purchasing power of money falls
What did it mean the bank has to do when they were given responsibility for using Bank rate to deliver ‘price stability’?
To maintain the annual rate of inflation at around 2%
What happens if the bank’s MPC believes that inflation is likely to remain higher than the target rate?
It increases Bank rate
What happens to interest rates when Bank rate goes up?
Most lenders will automatically increase interest rates
What is the objective in increasing Bank rate?
To reduce consumer spending
What is the result of falling demand for property?
Prices will fall and builders may decide to build fewer new properties
Credit crunch definition
A reduction in the availability of loans or a tightening of conditions needed to obtain one
What did the credit crunch result in banks doing?
- Reducing their maximum loan-to-value ratios to 75% or less
- Dropping mortgage income multiples back down to three times gross salary or less
- Tightening credit scoring procedures
Which homeowners were worst affected by the financial crisis?
- Those who had used high loan-to-value mortgages to buy properties
- Those who had taken advantage of mortgage equity withdrawal
How did the Bank of England help mortgage holders to keep up to date with monthly payments?
By cutting Bank rate as far as possible
Marginal borrowers definition
People who are only just managing to pay even at a lower interest rate
How can interest rates affect investors?
Prices of shares listed on the stock market may fall after a rise in interest rates
What is the hope when the MPC increases Bank rate?
That increasing the cost of borrowing will reduce consumer and corporate spending, so reducing overall demand for goods and services
Guaranteed growth/guaranteed capital plans use what to offer investors a return linked to the stock market?
Derivatives
How do guaranteed capital plans work?
If stock market falls, they get back their original investment
How do guaranteed growth plans work?
If the stock market falls their get back their original investment plus a minimum growth amount
What is the risk with guaranteed capital and growth plans
They are not covered by the FSCS
What is a healthy economy?
One in which demand for goods and services is high enough to keep unemployment at an acceptable low level, but not so high that it causes unacceptable levels of inflation
Economic activity in the UK is fuelled by demand for goods from what sources?
- Consumer demand
- Corporate demand
- Government spending
- Demand for exports
What is one of the government’s key roles and objectives?
To use the economic tools available to achieve and maintain full employment and low inflation
What happens when inflation goes above the government’s 2% target?
Interest rates are increased to reduce consumer and corporate spending, putting downward pressure on prices
What is manipulation of interest rates known as?
Monetary policy
Globalisation definition
The process that allows businesses to operate and trade all over the world
Individuals and businesses going abroad need financial providers to supply:
- Foreign exchange services
- Buy-back guarantees
- Credit and debit card accepted abroad
Economical external factor examples:
- Disposable income
- Unemployment level
- Interest rates
