CEMAP 1 Topic 2- Economic policy and financial regulation

Question 1

Key Macroeconomic objectives

Answer 1

Price stability – low and controlled rate of inflation.

Low unemployment – involves expanding the economy so that there is more demand for labour, land and capital.

Balance of payments equilibrium – Expenditure on imports of goods and services and investment income going abroad is
equal to the income received from exports of goods and services and the return on overseas investments.

Satisfactory economic growth – the output of the economy is growing in real terms over time and standards of living are getting higher

Question 2

KEY TERMS

Answer 2

INFLATION
A sustained increase in the general level of prices of goods and services.

DISINFLATION
A fall in the rate of inflation, ie prices are still rising, but less quickly than they were.

DEFLATION
A general fall in the price of goods and services. In other words, the inflation rate is below zero per cent – a negative inflation rate.

RECESSION
A significant decline in economic activity over a sustained period. Two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

GROSS DOMESTIC PRODUCT (GDP)
GDP is a measurement of a country’s overall economic activity. It is the monetary value of all the goods and services produced within the country (ie ‘domestically’) in a given period.

Question 3

Monetary policy

Answer 3

Monetary economists believe that inflation is caused by an increase in the money supply.

Monetary Policy- Measures taken to control
the supply of money in the economy (eg by raising or lowering interest rates) in order to manage inflation

The Monetary Policy Committee (MPC) of the Bank of England decides on the rate of interest
at which the Bank of England will lend to banks and other financial institutions

The Treasury retains the right to give instructions to the Bank of England regarding its monetary policy in “extreme economic circumstances”; otherwise the Bank acts independently of the government.

Question 4

Fiscal policy

Answer 4

Fiscal policy involves influencing the money supply and the overall level of economic activity, including consumption and investment, by manipulating the finances of the public sector (which comprises central government, local authorities and public corporations).

The public sector has a responsibility to provide certain services that are of national or regional importance, such as education, healthcare and transport.
To pay for these services, the government must raise funds from the private sector (indivs and firms) in the form of direct and indirect taxes.

FISCAL POLICY:
The adjustment of levels of taxation and public spending in a way that is intended to achieve the government’s macroeconomic objectives

Balanced Budget= Taxation is equal to public spending
Budget Surplus= Taxation is greater than amount put into public spending- economy contracts
Budget Deficit= Taxation is less than spent on public spending- economy expands

PUBLIC SECTOR NET CASH REQUIREMENT
A government that has a deficit must borrow to finance it. The public sector net cash requirement (PSNCR) is a cash measure of the public sector’s short-term net financing requirement

Question 5

Using Taxation to control inflation

Answer 5

Changes in taxation affect the market for financial services and products in two main ways:

Increased general taxation reduces the amount of money available for investment or to fund loan repayments.

Tightening of the taxation regime in relation to particular products or activities makes them less attractive to investors.

Question 6

How does the European Union regulate financial
services? (Brexit + Regulations and Directives)

Answer 6

BREXIT:
On 23 June 2016, the British public voted in a referendum for the UK to leave the European Union (referred to as Brexit).
The UK stopped being a member of the European Union (EU) on 31 January 2020. During a transition period that ran until 31 December 2020, the UK continued to follow all the EU’s
rules and its trading relationship remained the same

REGULATIONS
Have general application.
Are binding in their entirety, both in respect of what is to be achieved and how it is to be achieved.
Are directly applicable in all member states (unless particular states have specific dispensation).

DIRECTIVES
Are binding upon each member state to which they are addressed as to the result to be achieved.
Each member state has discretion as to how they go about achieving the stated aim of the directive.
The directive objectives must be achieved within a specific timescale (typically two years) but exactly how they are achieved is left to the authorities within each member state
to determine.

Question 7

Regulatory Oversight in the UK

Answer 7

Regulation of the financial services industry in the UK is a five-tier process.

1) EU legislation that the government retained in UK statute following Brexit. The two main types of EU legislation are regulations and directives

2) Acts of Parliament that set out what can and cannot be done. E.G Financial Services and Markets Act 2000 and the Financial Services Act 2012.

3) Regulatory bodies that monitor the regulations and issue rules about how legislation are to be met in practice. The main regulatory bodies in the UK are the (PRA) and the (FCA).

4) Policies and practices of the financial institutions themselves and the
internal departments that ensure they operate legally and competently, eg
the compliance department of a life assurance company.

5) Arbitration schemes to which consumers’ complaints can be referred. In
most cases, this is the Financial Ombudsman Service.