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R02 > Ch 3 > Flashcards

Ch 3 Flashcards

1
Q

What are the four main phases of the business cycle?

A

1) Recovery (followed by expansion or acceleration)
2) Boom
3) Slowdown/contraction
4) Recession

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2
Q

What are two effects of globalisation?

A

1) Investors can invest in foreign markets

2) Disadvantage low-skilled, labour intensive industries in developed world

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3
Q

What is GDP?

A

Total value of all goods and services produced domestically during calendar year

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4
Q

What is PSNCR?

A

Public Sector Cash Net Requirement - difference between gov’s expenditure and revenues

If expenditure>revenue = PSNCR grows
If expenditure

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5
Q

If the country is in recession, what will the public finances be like?

A
  • Tax revenues weak
  • Spending on unemployment rises
  • PSCNR will grow
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6
Q

If economy is expanding, what will the public finances be like?

A
  • Tax revenues rise
  • Spending on unemployment falls
  • PSCNR falls
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7
Q

When is the economy said to be contracting?

A

When GDP falls compared with previous quarter

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8
Q

When is the economy said to be in recession?

A

Two successive quarters of declining GDP

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9
Q

When is the economy said to be expanding?

A

When GDP rises compared with the previous quarter

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10
Q

What happens to fixed interest securities when the economy is booming?

A

Yields increase, price decreases

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11
Q

What happens to fixed interest securities when the economy is falling?

A

Yields decrease, price increases

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12
Q

What happens to the prices of equities as the economy moves out of recession?

A

Generally, equities strengthen as the economy expands when interest rates remain low

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13
Q

What is fiscal policy?

A

Use of government spending and taxation to influence both the both the level of demand in the economy and level of economic activity

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14
Q

How does the government use fiscal policy in a recession?

A

Increase spending/cut taxation

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15
Q

How does the government use fiscal policy in a boom?

A

Reduce spending/increase taxation

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16
Q

How does fiscal policy affect individuals and companies?

A
  • Individuals: the different tax treatment of the various types of assets will influence investment decisions
  • Company: the tax treatment of a company’s earnings will affect its dividend policy, and its choice of raising capital through debt and equities
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17
Q

What is monetary policy

A

Attempt to stabilise economy by controlling interest rates and the supply of money

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18
Q

Who sets interest rates?

A

Monetary policy committee

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19
Q

What is LIBOR?

A

The rate at which banks lend to each other

20
Q

How does the Bank of England ease monetary policy?

A

Reducing short term interest rates

21
Q

How does the Bank of England tighten monetary policy?

A

Increasing short term interest rates

22
Q

What is money supply?

A

The quantity of money available within the economy to purchase goods and services

23
Q

What is M0 also known as?

A

Narrow money

24
Q

What is M4 also known as?

A

Broad money

25
Q

What are the most commonly quoted measures of money supply in the uk?

A

M0 & M4

26
Q

What is M0 (money supply measure)?

A
  • Includes notes and coins in circulation plus banks’ operational deposits with the Bank of England
  • Reflects changes in the economic cycle, little effect on national output or inflation
  • Is an indicator of consumer spending and retail sales
27
Q

If there is a growth in M0, what does this indicate?

A

Consumer spending is buoyant

28
Q

If there is a contraction in M0, what does this suggest?

A

Consumers are behaving more cautiously

29
Q

What is M4 (money supply measure)?

A
  • Includes notes and coins in circulation plus banks’ operational deposits with the Bank of England PLUS the bank accounts of UK residents with UK banks and building societies
  • Includes deposits created by banks and building societies through their lending activities, as well as deposits lodged in accounts by people wanting to save
  • Acts as an indicated or the economy
30
Q

What does a growth in m4 indicate?

A

Increased demand for loans

31
Q

What is a rapid growth in money circulating in the economy often interepreted as?

A

Build up of inflationary pressures

32
Q

What is the measure of inflation in the UK?

A

CPI

33
Q

What does CPI measure?

A

Average change from month-to-month in the prices of consumer goods and services bought by consumers within the UK

34
Q

What is the lead measure of inflation used by the ons?

A

CPIH (including owner occupiers housing costs)

35
Q

What is disinflation?

A

When there is a decrease in the rate of inflation

36
Q

What is deflation?

A

There is a decline/inflation rate becomes negative

37
Q

What effect does inflation have on cash deposits?

A
  • Inflation erodes value of capital invested

- Interest rates tend to rise and fall in line with inflation

38
Q

What is a real return?

A

Return that exceeds rate of inflation

39
Q

What affect does inflation have on fixed interest securities?

A
  • Real value of capital will erode
  • Fixed income and so purchasing power will decrease with inflation, therefore investor is better off if inflation reduces
  • Prices tend to fall if inflation is deemed to be speeding up
40
Q

What effect does inflation have on equities?

A
  • Rising company profits will lead to increasing dividends and/or growth in capital value of shares
  • Equities tend to offer real growth
41
Q

What is the main tool used by central banks to control inflation?

A

Raising or lowering of short-term interest rates

42
Q

What is falling interest rates usually a signal for?

A

That the economy will expand in the medium term as a result of lower costs of borrowing

43
Q

How will falling interest rates affect cash deposits?

A

Make cash deposits less attractive

44
Q

What is the relationship between the price of fixed interest securities and interest rateds

A

Inverse:

- Eg as interest rates increase, price of fixed interest securities decrease

45
Q

What is the effect of lower interest rates on equities?

A

Company profits are usually higher as a result of the reduced cost of borrowing and higher demand

R02 (8 decks)

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