Chapter 2 - The Economic Environment Flashcards

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1
Q

What is a state controlled economy?

A
  • A state-controlled economy is one in which the state (in the form of the government) decides what is produced and how it is distributed.
  • It is also known as a planned economy or a command economy.
  • Large inequities can arise
  • Removes alot of individual choice and becomes bureaucratic

Soviet Union was one of the most famous state controlled economies.

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2
Q

What is a market economy?

A
  • In a market economy, the forces of supply and demand determine from cosnumers is how resources are allocated
  • Price of good, services, labour (wage) and money (money market’s interest rate) are based on supply and demand.
  • Scarse and in demand resources (incl labour skill) will have high value.
    *
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3
Q

What is a mixed economy?

A
  • A mixed economy combines a market economy with some element of state control. (most are this to a greater or lesser extent)
  • Wellfare systems are provided by the government to support unemployed, infirm and the elderly
  • Governments run key areas such as schools, hospitals, public transport, police, defence.
  • Civil Servants are the largest working groups.

All government expendature is raised through direct taxes from wage earners and companies, indirect tax from VAT, petrol, tabacco, and also raising money through borrowing from the capital market.

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4
Q

What is an Open Economy?

A

‘Open economy’ relates to a country’s economic relationship with outside countries

  • Few trading barriers and control over foreign exchange.
  • Barriers can include no trading of illegal drugs and other dangers for general public, country sanctions (Russia invading Ukrane sanctions).
  • The World Trade Organisation aim to prmote a near open economy.
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5
Q

What is protectionism in a market?

A

The restriction of other countries trading freely so that the domestic market can be protected.

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6
Q

What are the 4 macroeconomic objectives that governments aim to acheive?

A
  1. Full Employment
  2. Economic Growth
  3. Low Inflation
  4. Balance of Payments Equilibrium (imports vs exports)
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7
Q

What are the 4 stage of an economic cycle?

A
  1. Peak - GDP highest, No output growth,
  2. Contraction - GDP Declines
  3. Trough - GDP Lowest
  4. Expansion - GDP Increases
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8
Q

In an economic cycle what must happen for it to be classed as a recession?

A

It must have two consecutive quarters of declining GDP (negative growth).

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9
Q

What is fiscal policy?

The economic enviroment

A

When the government spent money or collect money with the intention to influence the condition of the economy.

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10
Q

How does the government influence the economy through tax?

A
  • Lower tax means more disposable income for spending creating more demand for goods and services.
  • Higher tax means less disposable spending reducing demand artificially
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11
Q

How does the goverment influence the economy though its budget?

A
  • If its in a deficit budget it has got too much money so may lower tax to have it at an equilibrium.
  • If the budget is in surplus it will need to raise more moeny and can do so through tax.
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12
Q

What is PSBR in terms of fiscal policy?

A

‘Public Sector Borrowing Requirement’ occurs when there is budget deficit (i.e. public expenditure > public income). Borrowing is required to make up the difference

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13
Q

What effect does fiscal policy have on businesses?

A
  • Ability to effectively plan ahead (stable government is ideal)
  • Cost of labour, tax, national insurance
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14
Q

What is monetary policy?

A
  • Regulation of the economy through control of the monetary system incl. money supply (circulation), price of currency, the level of interest rates.
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15
Q

How is monetery supply controlled?

A
  1. Reduce/Increase Credit Lending
  2. Impose requirements for banks to hold a minimum cash rerserve ratio.

The latter temporarily holds supply.
Alternatively the government with the treasury can remove currency from circultion that is collected through taxes. (not in exam)

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16
Q

What are some effects of high inflation?

A
  1. Consumers will be encouraged to save with higher interest rates.
  2. Mortages payments rise leaving less disposable income
  3. Higher cost of credit will defer borrowing thus less spending
  4. Corporate investments decline
  5. Loss of confidence and future prospect in the economy from corporations.
  6. Less investment leads to less growth.
  7. Higher Wages
  8. Higher unemployment causing low tax income for the government
  9. Unemployment benefits increase
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17
Q

What is the role of the central bank?

A

Responsible for setting nation’s short term interest rate, controlling money supply, acting as banker and lender of last resort to the banking system and managing national debt.

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18
Q

What is the central bank’s responsibilities?

A
  • Banker to the banking system by accepting deposits from, and lending to, commercial banks.
  • Banker to the government.
  • Manages the national debt.
  • Regulating the domestic banking system.
  • Lender of last resort in crises to prevent systemic collapse of banking system.
  • Setting official short term interest rate.
  • Controlling the money supply.
  • Issuing notes and coins.
  • Holding the nation’s gold and foreign currency reserves.
  • Influencing the value of nation’s currency through activities such as interventions in currency markets.
  • Provide depositors’ protection scheme for bank deposits.
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19
Q

What is the BOE?

A

Bank of England is a central bank for the UK founded in 1694.
It’s two core purposes are acheiving monetary stability through price stability, and also acheiving financial stability by detecting threats to the financial system as a whole.

It also carries all other reponsibilites accossaited with central banks.

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20
Q

Who and what committee sets the UK interest rates? Also what is this committees goal?

A

The Bank of England’s “Monetary Policy Committee.”
Their goal is to ensure inflation remains within the governments set range each year.

Made up of 9 members.

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21
Q

What is Quantitative Easing?

A

When inflation is so low that it risk being negative, the central bank has to create more money (called a cash injection) so that it can increase supply, reducing the value of each unit so that it can create artificial inflation promoting growth.
This does not involve printing notes, it uses this money to buy government and corporate bonds. It can also buy other assets to boost liquidity.
It aims to reduce cost of borrowing so spending increases.

Easiest to watch a video on it.

Deflation can cause a recession or depression.

Sometimes QE can have a negative effect and spead up the effects of deflation.

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22
Q

When an economy is referred to as “stagnating”, what does it imply?

A

Inflation is near 0%.

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23
Q

What is quantatative tightening?

A

The reversing of quantatative easing by selling or stoppig reinvestment into bonds and other assets to lower inflation

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24
Q

Why do we need financial stability?

A
  • Provide a main medium for paying for goods/services and assets.
  • Intermediating between savers and borrowers, investments incl debt.
  • Insuring against deperting risk.
25
Q

Who manages the UK national debt instead of the Bank of England?

A

DMO - Debt Management Office

26
Q

What is the DMO?

A

Debt Management Office. They manage the UK national debt and provide the Financial Services Compensation Scheme (FSCS) operations for depositors.

27
Q

What is the Federal Reserve System (Fed)

A

The 12 US regional banks that make up the Central Banking System and are the lenders of last resort.

Equivalent to the Bank of England but on a larger geographical scale hence more banks involved.

28
Q

What committee oversees the Federal Reserve Bank?

A

FOMC - Financial Open Market committe

Equivilent to the UK’s Monotary Policy Committte (MPC)

29
Q

What does the term contagion mean?

A

When wide spread panic creates a systematic risk in the financial system.

30
Q

What is the ECB and what is it responsable for?

A

The European Central bank is responsable for setting the monetary policy for the entire Eurozone and maintaining price stability through keeping inflation at 2%.

31
Q

What economic data is used for economic modelling and central bank decision making?

A
  • Gross Domestic Product
  • Balance of Payments
  • Budget Defecit/Surplus
  • Unemployment levels
  • Exchange Rates
  • Inflation/Deflation
32
Q

What is Inflation?

A

Persistent increase in the general price level.

33
Q

What are the 5 issues of having high levels of inflation?

A
  1. Continuous price updates for businesses
  2. Employee salaries real value are eroded
  3. Fixed Incomes rate can fall (even further) below inflation rate
  4. Exports become less competitive
  5. Pensions and Invesmtent income isnt easy to asses (disincentive to save)
34
Q

What are the 2 positive outcomes of inflation?

A
  • House prices rise thus borrowing debt falls in real terms. (i.e sell the house for more than the mortage)
  • National debt real value will be eroded.
35
Q

What are the 3 main measurements that make up the inflation value?

A
  1. Consumer Price Index (CPI)
  2. Consumer Price Index including Housing Costs (CPIH)
  3. Retail Price Index (RPI)
36
Q

What is CPI

A

Consumer Price Index - measures the change of the price of goods and services over time. I.e. how much did £10 buy me last year compared to today.

37
Q

What is CPIH

A

Consumer Price Index inclduing Housing - measures the change of the price of goods, services and housing costs over time. I.e. how much did £1000 buy me last year compared to today.

38
Q

What is GDP

A

Gross domestic Product

Consumer Spending + Government spending + Investments + Exports - Imports = GDP

39
Q

What is balance of payments?

A

The balance of payments is a summary of all the transactions between the UK and the rest of the world.
If the UK imports more than it exports, there is a balance of payments deficit. If the UK exports more than
it imports, there is a balance of payments surplus

40
Q

What is the current account?

A

A calculated total value of goods and services that flow in and out the country.

Linked to balance of payments

41
Q

What happens is the value of a currency rises in relation to exports?

A

Exports are less competitive

42
Q

What happens is the value of a currency lowers in relation to exports?

A

Exports are more competitive

43
Q

What is government debt?

A

What the government owes. Most widely quoted is public sector net debt

44
Q

What is the most widely quoted when referring to a budget deficit?

A

Public Sector Net Cash Requirement

45
Q

What is a ‘gig’ economy?

A

One where temporary positions are common amd organisations contract with independant workers for short term engagements as opposed to permanenet jobs.

46
Q
A
47
Q

What is a fixed rate system for an exchange rate?

A

One that is pegged to a particular currency.

48
Q

What is a floating rate system for an exchange rate?

A

One thats price is determined by supply and demand. No intervention from central bank. Also reffered to as free rate system.

49
Q

What is a target zone when referring to an exchange rate?

A

Target zone – similar to the fixed rate system, however, the exchange rate is managed within a band (upper and lower limit). This means that the rate can fluctuate; the central bank will only intervene if the upper or lower limits for the rate are breached.

50
Q

What is a ‘crawling peg’ when referring to an exchange rate?

A

Crawling peg – similar to target zone, but with upper and lower limit bands gradually widening. This system is generally used as a strategy for moving away from a fixed rate system.

51
Q

What is a ‘Managed Float’ when referring to an exchange rate?

A

Managed float – this is also known as a ‘dirty’ float. With this system, the exchange rate is largely a floating rate, but with occasional intervention from the central bank to alter the direction of the rate or the speed with which the rate changes

52
Q

What are the key differences between state-controlled and market economies?

Exam Question

A
53
Q

Which international organisation has the role of reducing trade barriers?

Exam Question

A

WTO - World trade Organisation

54
Q

What is the primary role of the Monetary Policy Committee (MPC)?

Exam Question

A

To set interest rates

55
Q

What are the negative effects of inflation?

Exam Question

A
56
Q

What are the principal differences between the CPI and CPIH?

Exam Question

A

CPIH including housing costs

57
Q

What economic measure is used as an indicator of the health of the economy?

Exam Question

A

GDP - Gross Domestic Product

58
Q

What is the potential impact of increasing levels of government spending on the PSNCR and inflation?

Exam Question

A

PSNCR difference will show a larger shortfall. Government may raise taxes to cover this.

59
Q

What is the impact of high unemployment levels on the economy?

Exam Question

A