BA1

Question 1

5 Examples of direct taxes

Answer 1

Income, NI, Corporate, Inheritance, Capital gain

Question 2

3 examples of indirect taxes

Answer 2

VAT, Excise duties(govt tax on goods in country), custom duties(govt tax on goods manufactured outside & imported)

Question 3

If government tax revenue is less than expenditure it means ___________

Answer 3

government deficit

Question 4

Amount of borrowing government borrows to fix budget deficit is called the _________

Answer 4

PSNCR( Pulic sector net cash requirement)

Question 5

How do governments raise capital (ie borrow money)

Answer 5

By selling government securities to financial institutions

Question 6

Governments can either fix deficit by

Answer 6

1. Borrowing
2. taxes
3. reduce public expenditure

Question 7

To recover from recession the government must

Answer 7

1. cut interest rate

2. Run budget deficit

Question 8

Types of unemployment

Answer 8

1. Real wage (classical)
2. Seasonal
3. Frictional
4. Structural
5. Technical
6. Cyclical/ demand deficient(or Keynesian unemployment)

Question 9

Cyclical unemployment exists when

Answer 9

when individuals lose their jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either demand deficient, general, or Keynesian unemployment.

Question 10

Classical unemployment occurs when…

Answer 10

When wages are too high

Question 11

Keynesian VS Monetarist view on unemployment

Answer 11

Keynesian- Unemployment occurs due to insufficient AD; solution is to boost AD, esp by increasing G (govt spending)
Monetarist: UE is caused by people unwilling to take jobs that exist. Instead should cut benefits, make it harder to claim benefits

Question 12

Keynesian VS Monetarist view on Inflation

Answer 12

Keynesian- Excessive AD so reduce AD by cutting G and increasing T

Monetarist- Caused by excessive growth in money supply, should cut growth of money supply to match growth of economy, by cutting govt spending, increasing iRates to reduce borrowing, OMO(open market operations)

Question 13

Stagflation

Answer 13

• inflation + slowing of the economy

ex: supply shock(supply of oil declines) and causes hike in prices causing reduction in demand –> slow economy

Question 14

6 factors that affect fx rate

Answer 14

1. Differentials in inflation(Low inflation = increase exchange)
2. Interest rate (better yields from savings in pounds, so demand increases–> rise in Pound)
3. Current account deficit( country will borrow foreign capital to reduce debt
4. public deficits
5. terms of trade- if terms of trade improves(export > import)–> fx decreases ; if terms of trade declines(import> export) –> fx increases
6. Political stability: reduction in confidence could lead to decline in fx rate

Question 15

What happens when the govt increases interest rates?

Answer 15

Internal: Consumer spending falls, investment falls, asset values fall, savings increase, AD falls
External: foreign funds attracted, exchange rate increases
Business: cost may rise, investment falls, revenue may fall

Question 16

How to manage interest rate risk?

Answer 16

1. FRA (forward rate agreement) locks company into target interest rate
2. Interest rate futures (locks company into effective interest rate)