Chapter 1: The UK Financial Services Sector Flashcards
Which of the following is most likely NOT to be true?
A. The greater the money supply the higher interest rates are likely to be
B. The greater the money supply the lower interest rates are likely to be
C. Interest rates are likely determined by the supply and demand of ‘loanable funds’
D. Interest rates are effectively the cost of money
A. The greater the money supply the higher interest rates are likely to be.
According to Monetary economic theory, rates are more likely to increase when money is in SHORT supply.
You are an advisor to the government regarding their fiscal policy. The government wish to reduce unemployment and stimulate the economy. Which of the following would NOT be considered appropriate advice for you to supply?
A. Increase government spending
B. Implement government training programmes
C. Decrease tax paid by companies
D. Reduce interest rates and increase the money supply
D. Reduce interest rates and increase the money supply.
Managing rates is considered monetary, not fiscal, policy.
The UK government invests a large amount of money in government-funded training schemes. Which of the following is LEAST LIKELY to be a possible consequence?
A. The scheme would contribute to a reduction in unemployment as those not in employment, education or training would be gainfully occupied
B. All other things being equal, government spending would increase, potentially increasing any budget deficit
C. As the money is being spent on the training schemes, there would be less money in circulation within the UK economy
D. Yields on government bonds may increase
C. As the money is being spent on the training schemes, this would lead to an increase in the money supply.
If taxation remained constant, the increased spending would further increase any budget deficit. To cover this deficit, the government would need to issues more gilts. An increase in the number of gilts may dilute the price, increasing the yields.
A bond’s yield is based on the bond’s coupon payments divided by its market price; as bond prices increase, bond yields fall, and as bond prices decrease, bond yields rise.
Who is responsible for defining Eurosystem policies?
A. The Monetary Policy Committee of the ECB
B. The Governing Council of the ECB
C. The Council of Europe
D. The Council of NCBs
B. The Governing Council of the ECB is responsible for monetary policy of the single currency, including the definition of price stability.
In a typical developed country how long does a business cycle seem to last for?
A. 5 to 7 years
B. 5 to 10 years
C. 8 to 10 years
D. 7 to 15 years
C. 8 to 10 years, this timeframe is based on past economic history.
Consider the following:
Country A: GDP = 100, GNP = 110, National income = 40
Country B: GDP = 150, GNP = 170, National income = 50
Which of the following statements can be considered to be true?
A. Country A has greater investment overseas and has a greater potential for growth than B
B. Country B has a greater net property income from abroad and greater capital consumption than Country A
C. The wealth of Country B is enhanced through non-domiciled workers
D. The residents of Country B are wealthier on average than Country A
B. Country B has a greater net property income from abroad and greater capital consumption than Country A.
Net property income from abroad = GNP - GDP
So, Country A: 110 - 100 = 10
And Country B: 170 - 150 = 20
Capital consumption = GNP - National income
So, Country A: 110 - 40 = 70
And Country B: 170 - 50 = 120
So, Country B has greater net property income from abroad and greater capital consumption than Country A.
Which is the primary regulator of the US securities market?
A. The Federal Reserve
B. The Securities and Exchange Commission (SEC)
C. The Financial Industry Regulatory Authority (FINRA)
D. Commodity Futures Trading Commission (CFTC)
B. The SEC is the main regulator, however it works closely with other regulators and Congress.
Which of the following is NOT one of the FCA’s key priorities in relation to international regulation?
A. Extensive consultation with stakeholders
B. Promote a principles- and risk-based approach to regulation
C. Improve oversight of cross-border activities
D. Ensure that rules-based approaches to regulation are promoted at all costs
D. The fourth key priority is also to promote a principles- and risk-based approach to regulation.
The report published twice a year by the International Monetary Fund (IMF) is called:
A. Economic Outlook of the World
B. Global Economic Outlook
C. World Economic Outlook
D. Beige Book
C. The report published twice yearly by the IMF is called the World Economic Outlook.
Which of the following is NOT a basic task of the euro system?
A. Monetary policy
B. Foreign exchange operations
C. Hold and manage foreign reserves
D. Promote a single European payment system
D. The task is to promote the SMOOTH operation of payment systems.
Which of the following is NOT true?
A. Narrow Money refers to very liquid financial assets, including cash
B. A long-term cash deposit would meet the definition of narrow money
C. Broad money refers to a broader measure of financial assets which include less liquid assets
D. The most important measures of the UK’s money supply are M0 and m4
B. A long-term cash deposit would not be included as narrow money, as it is not readily accessible.
M0 is the amount of narrow money in circulation and M4 is the amount of broad money in circulation.
In order to calculate the National Income we must take:
A. GNP plus net property income from abroad minus capital consumption
B. GDP plus net property income from abroad minus capital consumption
C. GNP plus capital consumption
D. GDP plus net property income from abroad
B. The National Income = GDP plus net property income from abroad minus capital consumption.
Which of the following is NOT true regarding the Bank of England’s open-market operations (OMO)?
A. The Bank conducts an overnight-maturity, fine-tuning OMO at the end of each reserve’s maintenance period to ensure that the bank system’s net need for cash is provided as precisely as possible
B. The rate charged for borrowing using the OMO is 25bp above base rate
C. Fine-tuning usually takes place on the Wednesday preceding the Thursday MPC decision
D. Fine-tuning is for same-day settlement
B. The rate charged for Open-Market Operations is equal to base rate. The 25bp premium above base rate for. Or rowing is applied for operational standing facilities, not open-market operations.
The Bank of England (BoE) engages in money market operations in order to help implement the Monetary Policy Committee’s interest rate decisions. Which facts are true of the ability of eligible banks to borrow or lend at the base rate?
- The reserves averaging scheme requires banks to hold funds at the BoE. If at the end of a set period the bank has held, on average, a pre-determined level of funds, it will receive the base rate.
- The operational standing facility allows an eligible bank to borrow at the base rate, in exchange for a deposit of eligible collateral.
- The discount window facility allows eligible banks to borrow gilts in exchange for a deposit of other collateral plus a premium determined by the base rate.
- Open market operations allow eligible banks to engage in short-term repos with the BoE at the base rate.
A. 1 and 2
B. 1 and 4
C. 2 and 3
D. 2 and 4
B. 1 and 4 are correct.
The operational standing facility does allow banks to borrow in exchange for a deposit of eligible collateral. However, the rate on this would be 25 basis points above the base rate. Deposits are also accepted at 25 basis points below the base rate.
The discount window facility does allow eligible banks to borrow gilts in exchange for a deposit of other collateral plus a premium. The premium, however, is determined by the quality of the collateral.
In open market operations, the short-term repo is the basis. Note, however, that the long-term repo rate will be based on market rates.
Which of the following is NOT true regarding Quantitative Easing (QE)?
A. It is a way of taking money out of the banking system
B. The US was the first country in the recent recession to adopt QE
C. QE was used by Japan when it faced deflation in the early-to-mid 2000s
D. The risk of QE is to cause an inflation bubble of bonds
A. QE is a way of pouring money into the banking system, not taking it out.
