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Chapter 2 Flashcards

1
Q

The UK is in recession. The Government of the day is MOST likely to use which of the following strategies to combat this?
Select one:
a. Increase public spending and reduce taxation.
b. Reduce public spending and reduce taxation.
c. Increase public spending and increase taxation.
d. Reduce public spending and increase taxation.

A

a. Increase public spending and reduce taxation.

SEE CHAPTER 2D1

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2
Q 
Mushtak is looking for an investment that will provide him with a good hedge against inflation. He is MOST likely to invest in:
Select one:
a. conventional gilts.
b. bonds.
c. permanent interest bearing shares.
d. equities.
A

d. equities.

SEE CHAPTER 2E5A

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3
Q

Diane has a corporate bond where the capital value has been falling. The MOST likely reason for this is that:
Select one:
a. interest rates are falling and inflation is rising.
b. interest rates and inflation are falling.
c. interest rates and inflation are rising.
d. interest rates are rising and inflation is falling.

A

c. interest rates and inflation are rising.

SEE CHAPTER 2C1A

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4
Q 
If 'broad money' growth is being experienced in the UK, then this usually indicates that:
Select one:
a. lending activity has increased. 
b. inflation is likely to fall.
c. consumer spending is increasing.
d. interest rates are rising.
A

a. lending activity has increased.

SEE CHAPTER 2E

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5
Q

Carys has an index-linked UK Government gilt. The amount paid on this is linked to the:
Select one:
a. retail prices index.
b. owner occupiers’ housing costs index.
c. consumer prices index including housing costs.
d. consumer prices index.

A

a. retail prices index.

SEE CHAPTER 2E1

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6
Q

If an investor is expecting inflation to increase, which of the following assets will generally be negatively affected in real terms?
Select one:
a. Equities and index-linked gilts.
b. Gilts that pay a level amount and equities.
c. Cash in a bank account and gilts that pay a level amount.
d. Cash in a bank account and equities.

A

c. Cash in a bank account and gilts that pay a level amount.

SEE CHAPTER 2E6D

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7
Q 
Gross domestic product growth rates for the UK are +1.1%, -0.8.% and -0.1% respectively for the previous three quarters. The UK is now technically in a:
Select one:
a. recession.
b. slump.
c. slowdown. 
d. contraction.
A

a. recession.

SEE CHAPTER 2C

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8
Q

A country exports more goods and services than it imports. The result of this is likely to be a:
Select one:
a. deficit on the current account, weakening the currency.
b. surplus on the current account, strengthening the currency.
c. surplus on the current account, weakening the currency.
d. deficit on the current account, strengthening the currency.

A

b. surplus on the current account, strengthening the currency.

SEE CHAPTER 2E7

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9
Q 
What impact should falling interest rates USUALLY have on the economy?
Select one:
a. They boost the economy.
b. They have no impact on the economy.
c. They reign in a booming economy.
d. They promote tighter public spending.
A

a. They boost the economy.

SEE CHAPTER 2E6

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10
Q 
Which account in the context of balance of payments, deals with foreign investments in the UK, UK investment abroad and loans?
Select one:
a. Visible.
b. Capital.
c. Current. 
d. Invisible.
A

b. Capital.

SEE CHAPTER 2F

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11
Q

Investors must be aware of international developments when allocating money for investments, because foreign markets generally:
Select one:
a. have no impact on the UK.
b. move in step with each other.
c. move in the opposite direction to the UK.
d. move totally independent of the UK.

A

b. move in step with each other.

SEE CHAPTER 2A2

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12
Q 
If the Bank of England announced that the rate of inflation was 1% under their target level, what would this mean in practice?
Select one:
a. CPI was 1%.
b. CPI was 2%. 
c. RPI was 1.5%.
d. RPI was within 1% of CPI.
A

a. CPI was 1%.

SEE CHAPTER 2D2

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13
Q 
The British Pound is rising against the American Dollar. What will be the impact on a UK company's profits where the majority of their business is EXPORTING to the USA?
Select one:
a. They will steadily rise.
b. There will be no impact.
c. They will fall. 
d. They will sharply rise.
A

c. They will fall.

SEE CHAPTER 2E7B

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14
Q 
Garth, Phil and John are discussing economics over a pint at their local. John thinks Phil was wrong to include tax reductions as an example of fiscal policy and also that Garth was wrong including quantitative easing as an example of monetary policy. Who was right?
Select one:
a. Both Garth and Phil. 
b. Phil only.
c. Garth only.
d. John.
A

a. Both Garth and Phil.

SEE CHAPTER 2D1-2

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15
Q

Peter has purchased a holiday home in Spain and rents it out to UK residents only. What will be the effect on the UK balance of payments?
Select one:
a. It will affect the capital account and the current account.
b. It will affect the current account only.
c. There will be no impact.
d. It will affect the capital account only.

A

a. It will affect the capital account and the current account.

SEE CHAPTER 2F

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16
Q 
Mary is arguing with her sisters Tilly and Poppy about the economy. Tilly thinks deflation is a good thing for the economy since it will create growth. Poppy thinks inflation is good for the economy since holders of fixed income securities will benefit in real terms. Mary thinks they are both wrong. Who is right?
Select one:
a. Mary. 
b. Poppy only.
c. Tilly only.
d. Tilly and Poppy.
A

a. Mary.

SEE CHAPTER 2E3-4

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17
Q

The quantity of money in the UK has increased without a corresponding increase in the value of goods and services that can be bought. The result is likely to be that the value of each unit of money will:
Select one:
a. increase and the general level of prices will fall.
b. fall, as will the general level of prices.
c. increase, as will the general level of prices.
d. fall and the general level of prices will increase.

A

d. fall and the general level of prices will increase.

SEE CHAPTER 2E

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18
Q 
What occurs when investors lose sight of the fundamental values and buy shares or other assets because they expect prices to continue to rise?
Select one:
a. A financial bubble. 
b. A financial expansion.
c. A financial peak.
d. A financial boom.
A

a. A financial bubble.

SEE CHAPTER 2A3

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19
Q

Jonny is looking to invest into equities. From what point in the business cycle is he likely to experience the most rapid growth in his shares?
Select one:
a. As the economy moves on from the end of a recession.
b. As the economy moves on from the end of a boom.
c. As the economy moves on from the end of an slowdown.
d. As the economy moves on from the end of an upturn.

A

a. As the economy moves on from the end of a recession.

SEE CHAPTER 2C1B

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20
Q

When the gross domestic product of a country rises compared with the previous quarter, it is generally TRUE to say that:
Select one:
a. there is no public sector net cash requirement.
b. spending on unemployment rises.
c. the economy is expanding.
d. the economy is contracting.

A

c. the economy is expanding.

SEE CHAPTER 2C

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21
Q

When an economy is in the early stages of recovery, the prices of fixed interest securities are LIKELY to:
Select one:
a. increase due to falling interest rates.
b. increase due to rising interest rates.
c. decrease due to rising interest rates.
d. decrease due to falling interest rates.

A

a. increase due to falling interest rates.

SEE CHAPTER 2C1A

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22
Q 
When an economy is booming, this is MOST likely to result in a:
Select one:
a. rise in property values. 
b. fall in interest rates.
c. fall in the price of equities.
d. rise in unemployment.
A

a. rise in property values.

SEE CHAPTER 2C

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23
Q

Under quantitative easing the Bank of England purchases gilts. As a result, the total demand for gilts:
Select one:
a. decreases, leading to an increase in gilt yields.
b. increases, leading to a reduction in gilt yields.
c. decreases, leading to a reduction in gilt yields.
d. increases, leading to an increase in gilt yields.

A

b. increases, leading to a reduction in gilt yields.

SEE CHAPTER 2A1A

24
Q

If the UK were to export large quantities of crude oil, this would have a:
Select one:
a. positive impact on the balance of payments current account.
b. positive impact on the balance of payments capital account.
c. negative impact on the balance of payments current account.
d. negative impact on the balance of payments capital account.

A

a. positive impact on the balance of payments current account.

SEE CHAPTER 2F1

25
Q 
In the first quarter of an economic year, the UK suffers negative growth. In which other quarter(s), if any, would it also need to experience negative growth before the UK was deemed to be in recession?
Select one:
a. Any two other quarters.
b. Quarters two and three.
c. Quarter two only. 
d. Either quarter two or quarter three.
A

c. Quarter two only.

SEE CHAPTER 2C

26
Q 
In February 2018, the UK inflation rate was 2.7%. In March 2018, the UK inflation rate was 2.5%. What term is used to describe this change?
Select one:
a. Deflation.
b. Inflation.
c. Stagflation.
d. Disinflation.
A

d. Disinflation.

SEE CHAPTER 2E2

27
Q

A country has witnessed a rapid growth in the amount of money circulating in the economy, as measured by M4. This is a sign that:
Select one:
a. there are fewer notes in circulation.
b. there are fewer coins in circulation.
c. inflationary pressures are building up.
d. the demand for loans is falling.

A

c. inflationary pressures are building up.

SEE CHAPTER 2E

28
Q

In the immediate aftermath of the 2011 Tsunami in Japan, the yen surged almost 5% against the US dollar. What action was then taken in the currency markets and by whom?
Select one:
a. The Bank of Japan acted alone and sold yen to deflate the economy.
b. The Bank of Japan and other central banks sold yen to avoid further deflationary pressures.
c. The Bank of Japan and other central banks bought yen to avoid further deflationary pressures.
d. The Bank of Japan acted alone by increasing interest rates.

A

b. The Bank of Japan and other central banks sold yen to avoid further deflationary pressures.

SEE CHAPTER 2A1A

29
Q 
An economy's gross domestic product for the first three quarters of the year is £1 billion, £1.2 billion and £1.1 billion respectively. After quarter three the economy is said to be:
Select one:
a. in recession.
b. in a depression.
c. in a trough.
d. contracting.
A

d. contracting.

SEE CHAPTER 2C

30
Q

Seve has a portfolio which includes UK shares, cash and fixed interest securities. Over the next two years, inflation is predicted to rise. It is TRUE to say this would typically:
Select one:
a. have no impact on his cash holdings.
b. be negative for his equity holdings.
c. be supportive for his fixed interest holdings.
d. be supportive for his equity holdings.

A

d. be supportive for his equity holdings.

SEE CHAPTER 2E4

31
Q

What combination of measures taken by the Bank of England in 2009 was intended to boost the UK economy?
Select one:
a. Low inflation and high interest rates.
b. Low inflation and low interest rates.
c. Quantitative easing and low inflation.
d. Quantitative easing and low interest rates.

A

d. Quantitative easing and low interest rates.

SEE CHAPTER 2A1A

32
Q

A Japanese company is looking to establish a new factory in the UK. Assessing this decision in isolation, what would be the likely change in the exchange rate between UK Sterling and Japanese Yen?
Select one:
a. Sterling would weaken and Yen would appreciate.
b. Both Sterling and Yen would appreciate at the same rate.
c. Sterling would appreciate and Yen would weaken.
d. Both Sterling and Yen would weaken at the same rate.

A

c. Sterling would appreciate and Yen would weaken.

SEE CHAPTER 2E7

33
Q

Candice owns fixed interest securities. If interest rates were to rise, their:
Select one:
a. yield and their value will both fall.
b. yield and their value will both rise.
c. value will decrease and their yield will increase.
d. value will increase and their yield will decrease.

A

c. value will decrease and their yield will increase.

SEE CHAPTER 2E6B

34
Q 
Within the UK economy, there is a growth of money supply as measured by M0 and M4. What impact is this MOST likely to have, if any, on UK interest rates?
Select one:
a. It will have no impact. 
b. They will rise.
c. They will fall long term.
d. They will reduce short term.
A

b. They will rise.

SEE CHAPTER 2E

35
Q

The ageing population in the UK is most likely to result in:
Select one:
a. less emphasis on controlling inflation.
b. a greater proportion of wealth being spent on the manufacturing industry.
c. a decline in the service sector generally.
d. a boost for the financial services and leisure sectors.

A

d. a boost for the financial services and leisure sectors.

SEE CHAPTER 2A4

36
Q

If the UK was heading into a recession, the fiscal policies available to the government are:
Select one:
a. decreasing taxation only.
b. decreasing public spending and reducing taxation.
c. increasing public spending and reducing taxation.
d. decreasing public spending only.

A

c. increasing public spending and reducing taxation.

SEE CHAPTER 2D1

37
Q

In a boom period of an economic cycle, the most likely impact on the price of gilts is that they will:
Select one:
a. fall.
b. rise.
c. stay the same as they were in a recession.
d. rise and then level out.

A

a. fall.

SEE CHAPTER 2C1A

38
Q 
The UK government is looking to stimulate the economy. If it just uses monetary policy to achieve this, what action is it LEAST likely to take?
Select one:
a. Use quantitative easing.
b. Reduce income tax.
c. Reduce interest rates.
d. Increase levels of taxation.
A

b. Reduce income tax.

SEE CHAPTER 2D2

39
Q

In the UK, Peter receives interest at an annual rate of 1.2% on his savings. In Italy, Bertina receives 1.4%. The annual rates of inflation are 1.1% and 2.0% respectively. Based on this information, it is TRUE to say that:
Select one:
a. Bertina receives the highest real interest rate.
b. Peter receives the highest nominal interest rate.
c. they both receive the same nominal interest rate.
d. Peter receives the highest real interest rate.

A

d. Peter receives the highest real interest rate.

SEE CHAPTER 2E4A

40
Q

If the M0 measure of money supply is increasing rapidly, this could indicate that:
Select one:
a. the demand for loans is decreasing.
b. inflationary pressures are building up.
c. the demand for loans is growing.
d. deflationary pressures are building up.

A

b. inflationary pressures are building up.

SEE CHAPTER 2E

41
Q

If there is a sudden and unexpected rise in the rate of inflation, what is the most likely impact on the value of fixed interest securities and equities respectively?
Select one:
a. The value of fixed interest securities will rise, and the value of equities will fall.
b. The value of both fixed interest securities and equities will rise.
c. The value of both fixed interest securities and equities will fall.
d. The value of fixed interest securities will fall, and the value of equities will rise.

A

d. The value of fixed interest securities will fall, and the value of equities will rise.

SEE CHAPTER 2E5/2E5A

42
Q

If the Bank of England decides to sell securities this will typically:
Select one:
a. increase the money supply and increase short term interest rates.
b. increase the money supply and decrease short term interest rates.
c. reduce the money supply and increase short term interest rates.
d. reduce the money supply and decrease short term interest rates.

A

c. reduce the money supply and increase short term interest rates.

SEE CHAPTER 2E

43
Q

If, over the past year, Gross Domestic Product has moved as follows: quarter one £3.5bn, quarter two £4.2bn, quarter three £4.1bn, quarter four £4bn. Is it correct to deduce that:
Select one:
a. in quarter three the economy was contracting and in quarter four it was in recession.
b. if the next quarter shows another fall, the economy is in recession.
c. in quarter three the economy peaked and in quarter four it was contracting.
d. the economy is expanding overall.

A

a. in quarter three the economy was contracting and in quarter four it was in recession.

SEE CHAPTER 2C

44
Q

The difference between the government’s expenditure and revenues is known as the public sector net cash requirement (PSNCR). It is TRUE to say that:
Select one:
a. when unemployment is falling, the PSNCR is likely to increase.
b. when tax revenues are growing, the PSNCR is likely to increase.
c. in a growing economy, the PSNCR is likely to increase.
d. during recession, the PSNCR is likely to increase.

A

d. during recession, the PSNCR is likely to increase.

SEE CHAPTER 2C

45
Q

In the recovery phase of a business cycle, the economic conditions are characterised by:
Select one:
a. high interest rates and low inflation.
b. low interest rates and high inflation.
c. high interest rates and high inflation.
d. low interest rates and low inflation.

A

d. low interest rates and low inflation.

SEE CHAPTER 2C

46
Q

The government can use fiscal policy to influence the level of activity in the economy. It is TRUE to say that in times of:
Select one:
a. economic strength, fiscal policy may be used to reduce taxation.
b. economic strength, fiscal policy might be used to increase spending.
c. recession, fiscal policy might be used to cut taxation.
d. recession, fiscal policy might be used to reduce spending.

A

c. recession, fiscal policy might be used to cut taxation.

SEE CHAPTER 2D

47
Q 
In a recession it is MOST likely that the price of equities will:
Select one:
a. rise as will the yield on gilts.
b. fall as will the price of gilts.
c. fall as will the yield on gilts. 
d. rise as will the price of gilts.
A

c. fall as will the yield on gilts.

SEE CHAPTER 2C1

48
Q 
The gross domestic product (GDP) of the UK rose in quarter 1, before falling in quarter 2. If the GDP rises again in quarter 3, the UK economy is said to be:
Select one:
a. recessing.
b. fluctuating.
c. stagnating.
d. expanding.
A

d. expanding.

SEE CHAPTER 2C

49
Q 
Monetary policy measures the Bank Of England may take to influence economic activity during a recession could include:
Select one:
a. increasing government expenditure.
b. the sale of nationalised industries.
c. quantitative easing. 
d. reducing Value Added Tax.
A

c. quantitative easing.

SEE CHAPTER 2E

50
Q

The combination of low interest rates and adoption of quantitative easing in UK since 2009 was intended to:
Select one:
a. dampen down economic activity, accepting the risk of inflation falling below the Bank of England’s target of 2%.
b. dampen down economic activity thereby reducing the risk of inflation increasing beyond the Bank of England’s target of 2%.
c. provide the economy with a boost while accepting the risk of inflation falling below the Bank of England’s target of 2%.
d. provide the economy with a boost and reduce the risk of inflation falling below the Bank of England’s target of 2%.

A

d. provide the economy with a boost and reduce the risk of inflation falling below the Bank of England’s target of 2%.

SEE CHAPTER 2A1A

51
Q

In the typical contraction period of an economic cycle, output growth slows:
Select one:
a. and inflation falls, meaning the Bank of England is reluctant to cut interest rates.
b. but inflation remains high, meaning the Bank of England is keen to cut interest rates.
c. and inflation falls, meaning the Bank of England is keen to cut interest rates.
d. but inflation remains high, meaning the Bank of England is reluctant to cut interest rates.

A

d. but inflation remains high, meaning the Bank of England is reluctant to cut interest rates.

SEE CHAPTER 2C

52
Q

In early 2009 the Bank of England embarked on a policy of quantitative easing. What does this involve?
Select one:
a. Purchasing large quantities of gilts from banks.
b. Selling gilts to the banks.
c. Forcing banks to lend more money.
d. Lowering of taxation, particularly indirect taxation.

A

a. Purchasing large quantities of gilts from banks.

SEE CHAPTER 2A1A

53
Q

If the Bank of England chooses to tighten monetary policy this is MOST likely to lead to a:
Select one:
a. rise in asset prices although business will invest less.
b. fall in asset prices although businesses will invest more.
c. rise in asset prices and businesses will invest more.
d. fall in asset prices and businesses will invest less.

A

d. fall in asset prices and businesses will invest less.

SEE CHAPTER 2D2

54
Q

In practice, the impact of technological changes on a nation’s economic performance is best seen by:
Select one:
a. the proportion of the national output devoted to research and development.
b. the proportion of e-commerce to traditional retail output.
c. its ability to incorporate international advances into economic production.
d. the number of new products produced within an accounting year.

A

c. its ability to incorporate international advances into economic production.

SEE CHAPTER 2A5

55
Q

As a means of expanding the money supply, the government may prefer to increase its spending rather than reduce taxation because:
Select one:
a. more of the money is likely be spent on domestically produced goods and services.
b. government spending will reduce the budget deficit.
c. a reduction in taxation will not benefit more affluent people.
d. a reduction in taxation may result in an increase in exports.

A

a. more of the money is likely be spent on domestically produced goods and services.

SEE CHAPTER 2D1

56
Q

A fall in the value of the pound will typically lead to:
Select one:
a. an increase in the profitability of exports and a decrease in the share price of major exporters.
b. a decrease in the profitability of exports and a decrease in the share price of major exporters.
c. a decrease in the profitability of exports and an increase in the share price of major exporters.
d. an increase in the profitability of exports and an increase in the share price of major exporters.

A

d. an increase in the profitability of exports and an increase in the share price of major exporters.

SEE CHAPTER 2E7

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