Behaviour of the market

Question 1

Demand-pull inflation

Answer 1

A situation in which there is excess demand within the economy so that the firms are able to increase their prices. As a consequence, the general level of prices may be pulled up.

Question 2

Cost-push inflation

Answer 2

A situation in which if the firm’s costs go up, the firms will tend to pass on some of the increase in costs to customers through higher prices.

Question 3

Gross redemption yield

Answer 3

The geometric weighted-average of the forward rates over the period

Question 4

Components of returns from overseas investment

Answer 4

1. The return achieved by the investment as measured in domestic currency
2. The profit/loss from exchange rate movement

Question 5

Ways to increase short-term interest rates

Answer 5

1. Selling treasury bills
2. Contracting quantitative easing

Question 6

Why issuing index-linked bonds rather than fixed-interest bonds

Answer 6

1. Offer wider range of products (attract investors/low costs)
2. Believe that inflation would fall
3. Convince private sector that it will reduce inflation