Chapter 1 - The Financial Services Industry Flashcards
Who has the role of reducing trade barriers?
The World Trade Organisation promotes the growth of free trade between economies. It is called on to arbitrate when disputes arise.
What are the two main stabilisation policies used by government/central banks to reduce the impact of fluctuations in economic activity? And how do they work?
1) Fiscal Policy - making adjustments using government spending and taxation2) Monetary Policy - making adjustments using interest rates and the money supply
Who influenced a nation’s currency through activists such as intervention in the currency markets?
Central banks not government
Who sets the official short term rate of interest?
Central banks not government
What is the primary role of the Monetary Policy Committee and in what organisation do they sit in?
They sit in the Bank of England (central bank) and they determine the interest rate decisions (setting the base rate - short term interest rate) with the aim of ensuring inflation is hitting the target set by the Chancellor of the Exchequer (government).They also perform QE
What 3 vital functions does preserving the financial stability have on the financial system?
1) helps to provide a mechanism for paying for goods and services 2) intermediate between savers and borrowers3) insuring against and dispersing risk
In England, who manages the national debt and in which organisation do they sit?
Debt Management Office is part of government not part of the Bank of England.
What is the role of the Financial Services Compensation Scheme and which organisation does it sit (in England)?
It provides a depositors protection scheme for bank deposits - it sits in the BoE
How is the Fed run and managed? What is the FOMC?
A) Fed comprises of 12 regional Fed Reserve Banks each providing liquidity to the banks regions.B) The Fed is governed by 7 people appointed by the presidentC) FOMC is the Federal Open Market Committee - 7 people above and 5 of the 12 regional body presidents (of the 5 - the NY president is permanent the other 4 rotate)
What is credit creation and what can it lead to? How is it regulated?
1) Lenders borrow (credit), and banks create money2) Lenders spend on credit and give money to ppl.3) Those people deposit4) Banks use the deposit to create creditUnregulated credit/money supply leads to inflation: too much money chasing too few goods.96% of all money is from credit supply, 4% is cash.Regulated by BoE setting interest rates and imposing capital ratios (ie. How much or the % of cash you have to keep)(1/reserve requirement = credit: e.g 10% cash held is 10 times in credit value that the initial cash lump had in value)
Why causes inflation to rise?
Excess demand in the economyScarcity of workers and resources (reduced supply)Rapidly increasing government spending
What are the negatives of inflation?
Business continually have to update pricesSalary value erodes including future value of pensions and investments (includes those on fixed salaries)Exports are less competitive
What are the positives to inflation?
Rising house prices create a feel good factorDebt decreases in value (borrowers and national debt)
What is CPI?
Consumer Price indexExcludes mortgage interest payments and other housing costsUsing to compare against the rest of Europe (standard)Vs RPIX = RPI excluding mortgages interest payments but not the exact same sample as CPI
What’s is RPI?
Retail price indexIncludes mortgage and rent paymentsThis is used in indexed linked giltsRPIX - excludes mortgage interest payments
What is GDP and what does it contain?
Measures countries output calculated quarterly using expenditure basis.GDP = consumer spending + government spending + investment + exports - imports.Note. Includes production of foreign-owned factors produced in the UK. It excludes production of UK-owned factors of production held abroad
What is a balance of payment deficit?
UK imports more than it exports.It is a measure for the transactions between the UK and the rest of the world.Includes current (visible and non visible trade) and capital account (any other capital eg from profits).
What is the trade balance?
Comprises of:1) visible trade balance = value of imported goods - value of exported goods2) invisible trade balance = imported services - exported servicesExcludes dividends
What is the current account?
Values of goods and services that flow into and out of a country. It also includes receipts of dividends from overseas and remittances from nationals abroad
What is the capital account?
International capital transactions related to investment in business, real estate, bonds and stocks(Eg. If a company exports more than it imports, it has spare capital for investments the capital part is the capital account)
What is the PSNCR?
Public Sector Net Cash Requirement= government expenditure - government income.
What are the effects of unemployment?
Indicates low demand for goodsReduced tax income for government and increased social security payments
What Key Economic Indicator is used to measure the changes in costs?
CPI (consumer price index ex. Mortgage interest) and RPI (retail price index inc. mortgage interest) measures inflation
What Key Economic Indicator is used to measure the countries output?
GDP (consumer spending + government spending + investment + exports - imports)
