Chapter 11 - The economic environment for business Flashcards
What is the macro economy?
simply refers to the economy as a whole
What is macroeconomic policy?
the management of the economy by government in such a way as to influence the performance and behaviour of the economy as a whole
Where the macro levels of demand and supply interact they represent what?
the size of the economy
The price point at which the macro levels of demand and supply interact represents what?
a national equilibrium price point
Governments set what 4 main goals?
Economic growth - high
Inflation - low and stable
Unemployment - low
Balance of payments (import and exports) - equal
what conflicts arise from the pursuit of the governments objectives?
Full employment vs price stability
Economic growth vs balance of payments
What is monetary policy?
concerned with influencing the overall monetary conditions in the economy
What are the 3 monetary policy tools?
- changing interest rates
- quantitative easing
- bank reserve requirements
Higher interest rates does what to cost of capital, discount rates and NPV?
increased cost of capital -> Higher discount rates -> Lower NPV = lower company value
What are the 2 demand pull inflation responses?
Demand is too high
Money supply too great
How should the government respond to demand too high?
reduce demand by increasing taxation and reducing spending
How should the government respond when money supply is too great?
raise interest rates and increase reserve requirements
What are the 2 cost push inflation responses?
- encourage customers to switch providers
- allow currency to strengthen
How should the government respond to cost push inflation?
push customer to move supplier
What is the fiscal policy?
the manipulation of the government budget in order to influence the level of aggregate demand and therefore the level of activity in the economy
What is aggregate demand?
the total demand for goods and services in the economy
Fiscal policy covers what?
- Government spending
- taxation
- government borrowing
What can be used to influence aggregate demand?
Taxation
Spending
More tax does what to aggregate demand?
decreases demand as the more tax businesses pay the less they have to spend
Government spending does what to aggregate demand and inflation?
increases demand and inflation
What should the government be trying to balance?
how much they get from businesses in tax to what their spending
When do budget deficits occur?
government spending > more than taking in in taxation
What is an expansionary policy?
where there is a net injection into the economy to boost aggregate demand
What is a balanced budget?
total expenditure is matched by total taxation income
What is a surplus budget?
where government expenditure < taxation income
What is demand side policy?
using fiscal policy to inflate or deflate the economy
Governments can also take what specific measure to regulate businesses?
- competition policy
- privatisation
- provision of government assistance
- green policy and sustainability issues
- corporate governance guidelines
What does the competition policy encourage?
drives up standards and keeps prices down. Government can ensure that businesses cannot become too dominant in the markets they operate in
What is privatisation and what does it encourage?
moving the provision of some services to the free market can stimulate improvements in productivity and efficiency
What is government assistance?
can nurture start up companies so they are able to grow. By providing funds directly (grants) or advice, they can help companies to thrive
What do green policies and sustainability issues encourage?
firms to avoid negative externalities such as pollution and to encourage social benefits such as improved skills training
What is corporate governance?
system by which companies are directed and controlled
What issues does corporate governance cover?
ethics, risk management and stakeholder protection
Corporate governance frameworks contain regulations on what?
- separation of the supervisory function and the management function
- transparency in the recruitment and remuneration of the board
- appointment of NEDs
- establish audit committee and a remuneration committee
- establish of risk control procedures to monitor strategic business and operational activities
