Chapter 17 - Economic environment

Question 1

What is Macroeconomic policy?

Answer 1

The way in which a government will manage the economy as a whole

Question 2

What are the main objectives of Macroeconomic policy?

Answer 2

▪ Achieving a certain level of economic growth e.g. 2% each year
▪ Keeping inflation below a certain level e.g. 3%
▪ Maintaining high levels of employment
▪ Redistribution of wealth and income

Question 3

What is Aggregate demand ?

Answer 3

The total demand for goods and services in an economy.

Question 4

What can low aggregate demand lead to?

Answer 4

Unemployment

Question 5

What can high aggregate demand lead to?

Answer 5

Rise in inflation

Question 6

What is monetary policy?

Answer 6

Using interest rates to control the supply of money

Question 7

What does a rise in interest rates do? (2 things)

Answer 7

• Reduce the amount of money people have to spend

- Reduce aggregate demand

Question 8

What does a fall in interest rates do? (2 things)

Answer 8

• Increase the amount of money people have to spend

- Increase aggregate demand

Question 9

What is fiscal policy?

Answer 9

Using the relationship between taxation, government spending and borrowing to control demand in an
economy

Question 10

What does a reduction in taxation and increase government spending lead to? (2 things)

Answer 10

• Increase in government borrowing

- Increase in aggregate demand for goods and services

Question 11

What does an increase in taxation and increase government spending lead to? (2 things)

Answer 11

• Decrease in government borrowing

- Decrease in aggregate demand for goods and services

Question 12

What is demand pull inflation caused by?

Answer 12

Excess demand

Question 13

What is cost push inflation caused by?

Answer 13

Rising costs e.g. price of imported raw materials risen

Question 14

What are four ways a government may intervene in the regulation of a business?

Answer 14

Competition policy

Green policies

Government assistance

Corporate governance regulation

Question 15

What government intervention is described below?

a government can investigate and prevent anti-competitive agreements arising and abuse of dominant position.

Answer 15

Competition policy

Question 16

What government intervention is described below?

Externalities is a term which refers to wider costs which cannot easily be measured using conventional
accounting techniques. An example is the cost of polluting the environment. A government can legislate to reduce or avoid the impact of these externalities.

Answer 16

Green policies

Question 17

What government intervention is described below?

Governments can provide grants and subsidies to boost enterprise, encourage innovation and improve the skills of the workforce amongst other things.

Answer 17

Government assistance

Question 18

What government intervention is described below?

Governments can create a regulatory framework for corporate governance. This helps to improve the control and scrutiny that shareholders can exercise over the actions of directors of the company.

Answer 18

Corporate governance regulation

Question 19

What does Externalities mean?

Answer 19

Pollution

Question 20

What are the three main roles of a treasury function?

Answer 20

• Short term management of resources
• Long term maximisation of shareholder wealth
• Risk management

Question 21

What two things are involved in the below for the treasury function?

-Short term management of resources

Answer 21

• Short term cash management

- Currency management

Question 22

What two things are involved in the below for the treasury function?

-Long term maximisation of shareholder wealth

Answer 22

• Raising long term finance
• Investment decisions
• Dividend policy

Question 23

What two things are involved in the below for the treasury function?

-Risk management

Answer 23

• Risk exposure
• Interest rate risk management
• Hedging of foreign exchange risk

Question 24

What is the formula for Public expenditure?

Answer 24

public expenditure = taxes raised + government borrowing (+ sundry other income)

Question 25

What is separated due to corporate governance?

Answer 25

The supervisory function and the management function

Question 26

What is made transparent due to corporate givernance?

Answer 26

The recruitment and remuneration of of the board

Question 27

Who cannot be the same person due to corporate governance?

Answer 27

CEO and Chairman

Question 28

Most of the NED’s should be what?

Answer 28

Independant

Question 29

How long should service contracts for directors should not normally exceed how long?

Answer 29

One year

Question 30

What should the audit committee consist solely of?

Answer 30

NED’s

Question 31

What is the Turnbull report?

Answer 31

A recommendations, and a risk report