4.4 The Financial Sector and 4.5 Role of State

Question 1

What is a financial market

Answer 1

where buyers and sellers trade goods and services

Question 2

5 roles of financial markets

Answer 2

facilitate savings
lend to firms and individuals
facilitate exchange of g/s
provide forward markets
market for equities

Question 3

what is a forward market

Answer 3

where firms are able to buy and sell at a set price in the future

Question 4

what is speculation

Answer 4

when assets are bought at a low price and sold at a higher price

Question 5

how is a market bubbles created

Answer 5

investors see rising asset prices so they buy thinking it will continue to rise then sell to make profit
leads to excessively high prices so investors sell causing mass selling

Question 6

asymmetric info/moral hazard in financial sector

Answer 6

when a risk is taken by a bank where if the decision goes bad, a third party will bare the cost

Question 7

roles of the central bank

Answer 7

controls monetary policy
banker to the government
bank for other banks
financial regulation

Question 8

3 types of pubic expenditure

Answer 8

capital expenditure
current expenditure
transfer payments

Question 9

capital expenditure;

Answer 9

long term investments eg. HS2

Question 10

current expenditure;

Answer 10

day to day expenditure eg. civil servants , salaries

Question 11

reasons for change in public expenditure

Answer 11

recession
changing demographics eg age
economic cycle
economic philosophy eg uk free healthcare vs USA

Question 12

pros of public expenditure

Answer 12

can improve equality of opportunity
increases standard of living
reduces poverty/inequality
economic growth

Question 13

cons of public expenditure

Answer 13

corruption-> lower standards of living

may increase taxes to pay for expenditure

can negatively impact productivity as there’s no profit incentive. creates inefficiencies

Question 14

3 types of taxation

Answer 14

progressive
regressive
proportional

Question 15

progressive taxes

Answer 15

as income rises, % of income tax rises

Question 16

regressive taxes

Answer 16

as income rises, % of income tax falls

Question 17

proportional taxes

Answer 17

% of income taxed stays the same

Question 18

impact of rising tax on incentive to work + however

Answer 18

less incentive to work-> increased unemployment

However- people may work longer hours to maintain income-> more incentive to work

Question 19

impact of rising tax on tax revenues and diagram to use

Answer 19

laffer curve- tax revenue will rise as tax rate rises until optimum point where it starts to decrease again due to tax evasion and less motivation to work

Question 20

impact of rising tax on income distribution

Answer 20

progressive tax- higher tax will decrease inequality
regressive tax- higher tax will increase inequality

Question 21

impact of rising tax on real output and employment (direct, indirect, income tax effects)

Answer 21

increased direct tax-> lower disposable income-> lower consumption->lower AD

increased indirect tax-> higher costs-> lower SRAS

increased income tax->less incentive to work>lower LRAS as skilled workers move abroad

Question 22

impact of rising tax on price levels

Answer 22

cost push inflation

Question 23

discretionary fiscal policy

Answer 23

when govt make decisions about govt spending and taxation

Question 24

automatic stabilisers w example

Answer 24

occurs automatically eg recession

Question 25

impact of rising tax on trade balance

Answer 25

tax rise-> less income-> less consumption-> less imports

Question 26

difference between national debt and fiscal deficit

Answer 26

fiscal deficit is when the govt spend more than they receive in a year vs national debt-govt debt built up over years

Question 27

cyclical deficit

Answer 27

cyclical deficit- occurs during an economic downturn as tax revenues are low and spending is high

structural

Question 28

structural deficit

Answer 28

regardless of economic cycle

Question 29

factors influencing size of trade deficit (3)

Answer 29

trade cycle- eg during recession deficit will be higher as spending is higher and tax rev is lower

interest rates
unforeseen events

Question 30

factors influencing size of national debts (1)

Answer 30

aging population as pension spending rises

Question 31

use of policies (fiscal , monetary , supply side , exchange rate)

Answer 31

reduce fiscal deficits and national debts
reduce poverty/ inequality
changes in interest rates
improve international competitiveness

Question 32

what is market rigging with eg.

Answer 32

when institutions collude to fix prices or exchange rates to benefit themselves

eg. insider trading- when a person knows something that’ll happen in the future that others don’t know