Chapter 11 - The economic environment for business

Question 1

What is the macro economy?

Answer 1

simply refers to the economy as a whole

Question 2

What is macroeconomic policy?

Answer 2

the management of the economy by government in such a way as to influence the performance and behaviour of the economy as a whole

Question 3

Where the macro levels of demand and supply interact they represent what?

Answer 3

the size of the economy

Question 4

The price point at which the macro levels of demand and supply interact represents what?

Answer 4

a national equilibrium price point

Question 5

Governments set what 4 main goals?

Answer 5

Economic growth - high
Inflation - low and stable
Unemployment - low
Balance of payments (import and exports) - equal

Question 6

what conflicts arise from the pursuit of the governments objectives?

Answer 6

Full employment vs price stability
Economic growth vs balance of payments

Question 7

What is monetary policy?

Answer 7

concerned with influencing the overall monetary conditions in the economy

Question 8

What are the 3 monetary policy tools?

Answer 8

• changing interest rates
• quantitative easing
• bank reserve requirements

Question 9

Higher interest rates does what to cost of capital, discount rates and NPV?

Answer 9

increased cost of capital -> Higher discount rates -> Lower NPV = lower company value

Question 10

What are the 2 demand pull inflation responses?

Answer 10

Demand is too high
Money supply too great

Question 11

How should the government respond to demand too high?

Answer 11

reduce demand by increasing taxation and reducing spending

Question 12

How should the government respond when money supply is too great?

Answer 12

raise interest rates and increase reserve requirements

Question 13

What are the 2 cost push inflation responses?

Answer 13

• encourage customers to switch providers
• allow currency to strengthen

Question 14

How should the government respond to cost push inflation?

Answer 14

push customer to move supplier

Question 15

What is the fiscal policy?

Answer 15

the manipulation of the government budget in order to influence the level of aggregate demand and therefore the level of activity in the economy

Question 16

What is aggregate demand?

Answer 16

the total demand for goods and services in the economy

Question 17

Fiscal policy covers what?

Answer 17

• Government spending
• taxation
• government borrowing

Question 18

What can be used to influence aggregate demand?

Answer 18

Taxation
Spending

Question 19

More tax does what to aggregate demand?

Answer 19

decreases demand as the more tax businesses pay the less they have to spend

Question 20

Government spending does what to aggregate demand and inflation?

Answer 20

increases demand and inflation

Question 21

What should the government be trying to balance?

Answer 21

how much they get from businesses in tax to what their spending

Question 22

When do budget deficits occur?

Answer 22

government spending > more than taking in in taxation

Question 23

What is an expansionary policy?

Answer 23

where there is a net injection into the economy to boost aggregate demand

Question 24

What is a balanced budget?

Answer 24

total expenditure is matched by total taxation income

Question 25

What is a surplus budget?

Answer 25

where government expenditure < taxation income

Question 26

What is demand side policy?

Answer 26

using fiscal policy to inflate or deflate the economy

Question 27

Governments can also take what specific measure to regulate businesses?

Answer 27

• competition policy
• privatisation
• provision of government assistance
• green policy and sustainability issues
• corporate governance guidelines

Question 28

What does the competition policy encourage?

Answer 28

drives up standards and keeps prices down. Government can ensure that businesses cannot become too dominant in the markets they operate in

Question 29

What is privatisation and what does it encourage?

Answer 29

moving the provision of some services to the free market can stimulate improvements in productivity and efficiency

Question 30

What is government assistance?

Answer 30

can nurture start up companies so they are able to grow. By providing funds directly (grants) or advice, they can help companies to thrive

Question 31

What do green policies and sustainability issues encourage?

Answer 31

firms to avoid negative externalities such as pollution and to encourage social benefits such as improved skills training

Question 32

What is corporate governance?

Answer 32

system by which companies are directed and controlled

Question 33

What issues does corporate governance cover?

Answer 33

ethics, risk management and stakeholder protection

Question 34

Corporate governance frameworks contain regulations on what?

Answer 34

• 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