Chapter 2 Flashcards
What are the 4 phases in an economic cycle and what do each of them mean?
1) Recession - if GDP goes down over 2 consecutive quarters. Low profits, weak output, rising unemployment.
2) Recovery / Expansion - if GDP is higher than the previous quarter. People spend more, optimism grows, profits rise, interest rates are low, inflation remains low but can start to rise.
3) Boom - strong demand, inflation rises
4) Slowdown / contraction - lower GDP that previous year, economy slows down, slow sales, high inflation, reluctance to cut interest rates, cautious consumers
What are examples of direct taxes?
- Income tax
- National Insurance
- CGT
- inheritance tax
What are examples of indirect tax?
- VAT
- insurance premium tax
What affect does the business cycle have on the Public Sector Net Cash Requirement?
- Recession - Tax income is weak, unemployment grows, PSNCR grows
- Recovery - Tax income rises, unemployment falls, PSNCR falls
- Boom - Tax revenues are at their highest, PSNCR is at its lowest
- Slowdown - Tax income reduces, PSNCR grows
How do equities rise and fall alongside the economy?
They grow at their fastest during expansion, falter during the boom, fall fastest during the contraction and start to pick up during the recession.
How does the recovery phase effect the economy?
- fixed interest securities costs rise
- equity prices rise
- people spend more
- business sales increase
- company profits rise
- inflation and interest remains low
- PSNCR deficit falls
How does the boom phase effect the economy?
- prices and inflation start to rise
- interest rates increase
- yields from fixed interest securities need to be higher so prices fall
- equity prices start to falter
How does the slowdown phase effect the economy?
- output growth slows down
- inflation stays high
- sales start to drop
- unemployment rises
- equity prices fall
How does the recession phase effect the economy?
- government increase spending and cut taxation
- output growth and profits are slow
- inflation and interest rates are falling
- unemployment and business failure is high
- PSNCR will grow
- fixed interest securities start to rise
What is the fiscal policy?
The use of government spending and taxation.
What is the monetary policy?
Influencing interest rates and money supply
What is M0 and M4?
- M0 - Narrow money - notes and coins in circulation plus banks operational deposits with the Bank of England.
- M4 - Broad money - All of M0 plus all instant access account funds plus time deposits of UK residents with UK banks and building societies
What causes M0 and M4 to grow?
The Bank of England want to reduce money supply so they offer some new gilts at attractive rates. The public buy these so M4 is reduced as is the money supply.
OR
The Bank of England wants to increase money supply so they buy back gilts at attractive rates. The public sell these so M4 is increased as is the money supply.
What is quantitative easing?
Generating money electronically (printing money) to buy back gilts that have been sold to the public.
What is deflation and disinflation?
Disinflation = inflation still exists but the rate of growth is reducing
Deflation = the opposite to inflation. Prices are falling.
