5.3 The economic environment

Question 1

What is the result of a relatively low inflation rate, e.g. 2% for people’s attitudes?

Answer 1

• People are confident that the future value of their assets will not be eroded - happy to invest
• Healthy demand for lending

Question 2

What is the result of a relatively high inflation rate, e.g. 5%, for people’s attitudes?

Answer 2

• 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

Question 3

What do inflation-indexed savings accounts so?

Answer 3

Guarantee to preserve real value by paying a return that is the same as inflation

Question 4

What does chronic unemployment refer to?

Answer 4

The number of people who are unemployed for a long period - ie more than one year

Question 5

What product do people who change jobs frequently need and why?

Answer 5

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

Question 6

What happens to staff costs when employment is high?

Answer 6

They rise because salaries rise

Question 7

Costs to provider of making staff redundant:

Answer 7

• Redundancy payments
• Adverse publicity
• Valuable skilled workers may be lost

Question 8

Is inflation higher or lower during a period of economic activity and growth?

Answer 8

Higher

Question 9

What is the government’s target inflation rate?

Answer 9

2%

Question 10

Inflation and unemployment chain:

Answer 10

1. Low inflation/high unemployment
2. Spending is low
3. Government reduces interest rates to boost spending
4. Borrowing becomes cheaper
5. Spending increases
6. Businesses employ more workers to meet demand
7. Unemployment falls
8. Prices begin to rise
9. Inflation rises

Question 11

What is bank rate?

Answer 11

The rate of interest at which the Bank of England lends money to the banks

Question 12

What does the BoE decide at the meetings of its MPC?

Answer 12

Whether to change Bank rate

Question 13

In what situation would the Bank raise Bank rate?

Answer 13

If it were to anticipate rising inflation, in the hope that higher interest rates in the economy would stabilise inflation by drawing it down.

Question 14

Mark Carney, governor of the Bank, stated in 2013 that he would be unlikely to raise Bank rate if what?

Answer 14

Unemployment were to continue to be higher than 7%

Question 15

Effects of a rise in interest rates:

Answer 15

• 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

Question 16

As a result of people travelling abroad and business becoming more international, financial providers now supply what?

Answer 16

• 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

Question 17

Ways exchange rate movements impact on banks via the effect on customers:

Answer 17

• 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

Question 18

What was the basis of the UK lending a significant amount to the Irish government?

Answer 18

Subsidiaries of RBS and Lloyds (who the government had a shareholding) have made large loans to Irish property developers.

Question 19

Have defaults been as high as expected from the recession?

Answer 19

No - probably because of forbearance shown by banks and interest rates being very low

Question 20

What is the ‘Help to Buy’ scheme?

Answer 20

A government initiative intended to help first-time buyers.

Question 21

What are the products available under the Help to Buy scheme?

Answer 21

• Help to Buy mortgage guarantee scheme
• Help to Buy equity loan
• Help to Buy ISA
• Shared ownership

Question 22

When did the Help to Buy mortgage guarantee scheme end?

Answer 22

December 2016

Question 23

What happens in the Help to Buy mortgage guarantee scheme?

Answer 23

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

Question 24

What happens in a Help to Buy equity loan?

Answer 24

The borrower makes a deposit of 5% and the government lends 20%, the provider lends 75%

Question 25

What happens in a Help to Buy ISA?

Answer 25

The government will top up your savings by 25% up to a maximum of a £3,000 bonus

Question 26

What happens in the shared ownership scheme?

Answer 26

Some developers offer a chance to buy a share of your home (from 25-75%) and you pay rent on the rest

Question 27

What type of house does the shared ownership scheme mainly apply to?

Answer 27

New builds via housing associations

Question 28

What is the argument against schemes such as Help to Buy?

Answer 28

They boost demand for homes without doing anything to increase the supply of housing - it will only result in an increase in house prices

Question 29

How are many people indirectly affected by stock market movements?

Answer 29

Pension products are linked to the stock markets

Question 30

Providers responded to an increase in deposits after the stock market crashed in 2000 by developing what?

Answer 30

• 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.

Question 31

Hedge funds definition

Answer 31

A type of investment product that offers a positive return even when markets are falling - return is not guaranteed

Question 32

What does diversification mean in the context of stocks?

Answer 32

Buying shares in a different number of companies

Question 33

Banks and IFA’s warn individuals not to deal in the stock market unless what?

Answer 33

• They have some knowledge

- Have enough money to be able to buy shares in a different number of companies