5.3 The economic environment Flashcards
What is the result of a relatively low inflation rate, e.g. 2% for people’s attitudes?
- People are confident that the future value of their assets will not be eroded - happy to invest
- Healthy demand for lending
What is the result of a relatively high inflation rate, e.g. 5%, for people’s attitudes?
- Individuals and businesses are less certain about future so will be less willing to borrow
- They will look for investments that allow them to keep ahead of inflation
What do inflation-indexed savings accounts so?
Guarantee to preserve real value by paying a return that is the same as inflation
What does chronic unemployment refer to?
The number of people who are unemployed for a long period - ie more than one year
What product do people who change jobs frequently need and why?
Mobile pension schemes that they can take with them when they change jobs because they may not qualify for financial benefits that employers offer to long-term employees
What happens to staff costs when employment is high?
They rise because salaries rise
Costs to provider of making staff redundant:
- Redundancy payments
- Adverse publicity
- Valuable skilled workers may be lost
Is inflation higher or lower during a period of economic activity and growth?
Higher
What is the government’s target inflation rate?
2%
Inflation and unemployment chain:
- Low inflation/high unemployment
- Spending is low
- Government reduces interest rates to boost spending
- Borrowing becomes cheaper
- Spending increases
- Businesses employ more workers to meet demand
- Unemployment falls
- Prices begin to rise
- Inflation rises
What is bank rate?
The rate of interest at which the Bank of England lends money to the banks
What does the BoE decide at the meetings of its MPC?
Whether to change Bank rate
In what situation would the Bank raise Bank rate?
If it were to anticipate rising inflation, in the hope that higher interest rates in the economy would stabilise inflation by drawing it down.
Mark Carney, governor of the Bank, stated in 2013 that he would be unlikely to raise Bank rate if what?
Unemployment were to continue to be higher than 7%
Effects of a rise in interest rates:
- Existing borrowers paying a variable interest rate have to increase monthly repayments
- Potential borrowers discouraged
- Less money spent in economy - pushes down rate of economic growth
- Savers deposit more
As a result of people travelling abroad and business becoming more international, financial providers now supply what?
- Foreign exchange services
- Buy-back guarantees
- Credit and cash cards accepted abroad
- Products that help businesses to manage exchange rate risk so they will not lose if exchange rates move against them
Ways exchange rate movements impact on banks via the effect on customers:
- Rise in the rate of sterling makes imports cheaper, meaning importers need more payment services, foreign currency loans and trade insurance
- The same rise in sterling makes exported products more expensive and less competitive in foreign markets
What was the basis of the UK lending a significant amount to the Irish government?
Subsidiaries of RBS and Lloyds (who the government had a shareholding) have made large loans to Irish property developers.
Have defaults been as high as expected from the recession?
No - probably because of forbearance shown by banks and interest rates being very low
What is the ‘Help to Buy’ scheme?
A government initiative intended to help first-time buyers.
What are the products available under the Help to Buy scheme?
- Help to Buy mortgage guarantee scheme
- Help to Buy equity loan
- Help to Buy ISA
- Shared ownership
When did the Help to Buy mortgage guarantee scheme end?
December 2016
What happens in the Help to Buy mortgage guarantee scheme?
As long as the provider is willing to lend 95% of the purchase price, the government will guarantee the loan up to 15% of the purchase price
What happens in a Help to Buy equity loan?
The borrower makes a deposit of 5% and the government lends 20%, the provider lends 75%
What happens in a Help to Buy ISA?
The government will top up your savings by 25% up to a maximum of a £3,000 bonus
What happens in the shared ownership scheme?
Some developers offer a chance to buy a share of your home (from 25-75%) and you pay rent on the rest
What type of house does the shared ownership scheme mainly apply to?
New builds via housing associations
What is the argument against schemes such as Help to Buy?
They boost demand for homes without doing anything to increase the supply of housing - it will only result in an increase in house prices
How are many people indirectly affected by stock market movements?
Pension products are linked to the stock markets
Providers responded to an increase in deposits after the stock market crashed in 2000 by developing what?
- Guaranteed products, such as endowment policies and other investments that promise a certain return within a set number of years
- Alternative investment products, such as those provided by hedge funds, which can invest in ways that ordinary funds cannot.
Hedge funds definition
A type of investment product that offers a positive return even when markets are falling - return is not guaranteed
What does diversification mean in the context of stocks?
Buying shares in a different number of companies
Banks and IFA’s warn individuals not to deal in the stock market unless what?
- They have some knowledge
- Have enough money to be able to buy shares in a different number of companies
