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Intro to Securities and Investment > Chapter 2 - The Economic Environment > Flashcards

Chapter 2 - The Economic Environment Flashcards

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SIE Exam flashcards
1
Q

Factors influencing economic development

A

Demand side - consumer spending
Supply side - productive capacity

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2
Q

Economic systems are….

A

The means by which countries determine how they will use these resources to resolve issues

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3
Q

3 main types of economy are

A

State controlled economy
Market economy
Mixed economy

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4
Q

State controlled economy

A

One in which the state decides what is produced and how it’s distributed

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5
Q

Advantage of state controlled economy

A

Perceived advantage of planned economy (allocation of resources pre planned) is suggested to be low levels of inequality and unemployment
HOWEVER, this may not be the case and large inequality can arise

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6
Q

Market economies

A

The forces of supply and demand determine how resources are allocated

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7
Q

What is market clearing price in market economies

A

The price that reflects the balance between what consumers will pay and what suppliers will accept
Oversupply, price low
Under supply, price high and new producers into market

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8
Q

Mixed economies

A

Combines market with market element of state control
Government provides welfare system to support unemployed, elderly etc
Government raises finance by collecting taxes and indirect tax

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9
Q

Open economies

A

Relates to a country’s economic relationship with outside countries
Few barriers to trade

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10
Q

When a country prevents other countries from trading freely it’s called

A

Protectionism

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11
Q

WTO exists to promote…

A

The growth and free trade between economies

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12
Q

Government can use a variety of policies when attempting to reduce impact of fluctuations. These are known as..

A

Stabilisation policies
Categorised under fiscal and monetary

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13
Q

Fiscal policy

A

Involves making changes to government spending and tax

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14
Q

Monetary policy

A

Involves making changes to interest rates and money supply

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15
Q

Macroeconomic is

A

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

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16
Q

Main macroeconomic objectives are

A

Full employment
Economic growth (measured by increases in GBP)
Low inflation (target of 2%)
Balance of payments equilibrium

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17
Q

Name and explain stages of economic cycle

A

Peak - GDP at highest point, contraction of economy expected
Contraction - period where GDP declines as economic activity slows
Trough - GDP at lowest point, contraction phase is over
Expansion - economic activity picks up, GDP begins growing again. Early expansion is a moderate GDP increase. Late expansion is high rate of increase

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18
Q

The budget is

A

Statement of public income and expenditure over one year

Income = expenditure - balanced budget
Income < expenditure - deficit budget
Income > expenditure - surplus budget

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19
Q

Budget deficit means

A

Borrowing
Public sector borrowing requirement

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20
Q

Implications of fiscal policy on business

A

Planning - some fiscal policies influence level of aggregate demand and do businesses need to take this into account when planning output level, employment etc
Costs - tax and employers NI contributions will affect labour costs, hence cost of products and services

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21
Q

Monetary policy is concerned with

A

the volume of money in circulation and price of money or interest rates

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22
Q

The money supply

A

Stock of money in economy
Believed to influence volume of expenditure in economy and in turn influences output and prices

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23
Q

Under monetary policy, what can govt impose?

A

Credit squeeze and restrict lending to control spending and reduce inflation OR
Govt can impose reserve requirements on banks eg min cash reserve ratio

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24
Q

Interest represents

A

Price of money or cost of borrowing

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25
Q

In respect of interest rates it is assumed…

A

There’s a direct relationship between interest rate and level of spending in economy

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26
Q

An increase in interest rates is thought to discourage spending. Explain this and explain the argument against why this may not happen

A

Consumers encouraged to save with higher rates. Mortgages rise, less disposable. Higher cost of credit, deters borrowing and spending. Level of corporate investment to fall due to borrowing rate. Corporate sector may lose confidence in economy.

In reality….

Higher rates mean greater interest income and more spending
Higher wages due to mortgages
Higher rates attract capital inflows, appreciation on exchange rate, imports cheaper
Lower demand, more unemployment and more benefits
Low investment, would m an poor prospects of growth

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27
Q

Role of central banks

A

Acting as banker to banking system
Acting as banker to government
Regulating domestic banking system
Providing depositors protection scheme for bank deposits
Managing national debt
Influencing value of a nations currency through intervention in ccy markets
Issuing notes and coins
Holding gold and foreign currency reserves
Setting short term interest rate
Controlling money supply
Acting as lender of last resort in crisis

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28
Q

Government usually implement their monetary policy using

A

Central banks

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29
Q

Bank of England is the central bank of UK and was founded in 1964. Name/explain it’s 2 core functions

A

Monetary stability - stable prices and confidence in currency. Stable price involves meeting inflation targets (2%) by setting base rate
Financial stability - detecting and reducing threats to financial system. Vital to efficient conduct of monetary policy

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30
Q

Who are interest rate decisions made by?

A

Monetary policy committee

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31
Q

Who is monetary policy committee made up of?

A

Made up of 9 members, appointed by chancellor
Member of treasury also sits in the meetings (not allowed to vote), to make sure they are briefed on fiscal policy

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32
Q

What is the monetary policy committees main focus

A

To keep inflation in the government set range. MPC does this by setting base rate
Also responsible for quantitative easing. When setting base rate the MPC must be mindful to changes in growth, employment, and time lag between rate and effects

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33
Q

What is quantitative easing objective?

A

To inject cash directly into the economy to stimulate demand and return to inflation target

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34
Q

What was the worry when quantitative easing was introduced

A

Worry about falling into a deflationary spiral

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35
Q

What does quantitative easing involve?

A

The central bank creating money which is used to buy assets such as government bonds, high quality debt from private companies, resulting in more money in the economy

This doesn’t involve printing more notes. Central bank buys more assets from private sector. The seller then has more money while the central bank has more assets as part of its reserves

36
Q

Injecting more money into the economy through the purchase of bonds can mean

A

Seller ends up with more money, spends it, boosts growth
May buy other assets, boost prices, provide liquidity
Buying assets, higher prices, lower yields, lower borrowing costs
Banks holding more reserves, boosts lending, more spending

37
Q

Theory of quantitative easing

A

Extra money works it’s way through economy resulting in more spending, growth and reducing impact of recession
Difficult to tell if it works however, Uk and US have fared better post recession than other countries

38
Q

Unwinding Quantitative Easing = Quantitative Tightening

A

Done by banks stopping reinvestment or selling bonds. Should have effect of raising interest rates and lowering inflation

39
Q

Quantitative easing and tightening are most powerful when

A

Markets are stressed

40
Q

Purpose of preserving financial stability

A

Insuring against and dispersing risk
Intermediating between savers and borrowers. Channelling savings into investment via debt or equity
Providing mechanism for paying for goods services and assets

41
Q

What is financial policy committee tasked with?

A

Monitoring the stability and resilience of the UK financial system
Gives direction to the prudential regulation authority (PRA) and the FCA

42
Q

What is the Prudential Regulation Authority (PRA)?

A

Part of BOE and has assumed responsibility of supervision of banks

43
Q

Financial policy committee

A

Has powers of direction and recommendations
The FCP direction are binding instructions on the PRA and FCA who then make banks and building societies carry out resulting actions

44
Q

Bank of England doesn’t manage national debt true or false?

A

True

It is the debt management office (DMO)

45
Q

Depositors protection scheme is operated by…

A

Financial services compensation scheme

46
Q

The federal reserve

A

Comprises 12 regional reserve banks
Monitor activities, provides liquidity to the banks in the region
Free from political interference
Lender of last resort (has rescued lots of US financial institutions) has reduced widespread panic spreading throughout financial system (contagion)

47
Q

Federal open market committee

A

Chairman appointed by US president
Meet every 6 weeks to examine latest data

48
Q

European Central Bank

A

Based in Frankfurt
Creation of euro
Setting monetary policy in eurozone
Goal to maintain price stability
Acts independently but has succumbed to political persuasion
Acts as lender of last resort
Monitors financial stability of banks in eurozone (single supervisory mechanism)

49
Q

The single supervisory mechanism main aims

A

Ensure safety and soundness of Eu banking system
Increase financial integration and stability
Important milestone toward banking union jn Eu

50
Q

Key economic factors

A

Inflation
GDP
Economic and growth cycles
Balance of payments
Unemployment
Exchange rates

51
Q

Inflation

A

Persistent increase in level of prices
Excess demand
Scarcity of resources
Increase in government spending
Most western governments aim for 2-3% PA

52
Q

High levels of inflation can cause

A

Business having to continually raise prices
Pensioners will suffer
Exports less competitive
Real value of pension or investment income hard to access
Real value of salaries eroded

53
Q

Positives of high inflation

A

Raising house prices
Borrowers will benefit as real value of debt falls
Erodes country’s national debt in real terms

54
Q

Deflation

A

General fall in price levels
Can spiral where it creates vicious circle of reduced spending and reluctance to borrow

55
Q

Measuring inflation

A

Consumer price indices measure changes in prices to estimate how prices of goods and services change over time

CPI - consumer price index
CPIH - cpi including housing
RPI - retail price index

^ three main measures

56
Q

Office for National statistics

A

Collects data on typical shopping basket of 700 items month to month. Content of basket fixed for 12 months. Diff weight attached to diff items depending on importance

To calculate price, sets a base year for total cost of basket, then converted into an index. For CPI, CPIH the base year is 2015

57
Q

Annual rate of inflation

A

Percentage change in latest index compared with the value recorded 12 months previously

58
Q

Gross domestic product

A

Most commonly used measure of a country’s output

59
Q

Calculation of GDP

A

Consumer spending + government spending + investment + exports - imports = GDP

60
Q

Economic growth mainly depends on

A

Productivity of labour force
Rate at which economy channels savings and capital from overseas into new tech
Extent infrastructure is maintained and developed to cope with growing transport and communication and energy needs

61
Q

Mature economy labour force growth

A

1% PA

62
Q

Long term productivity dependent on

A

Education, training, utilisation of labour etc

63
Q

Balance of payments

A

Summary of all transactions between uk and rest of world

64
Q

Balance of payments deficit is

A

If uk imports more than it exports

65
Q

Balance of payments surplus

A

If uk exports more than it imports

66
Q

3 main parts of balance of payments

A

Trade balance
Current account
Capital account

67
Q

Trade balance is

A

Difference between value of imported and exported

Visible is raw materials
Invisible is banking and tourism

68
Q

Current account

A

Total value of goods and services that flow in and out

69
Q

Capital account

A

Records international transactions related to investment in business
Categories include:
Foreign direct investment
Portfolio investment
Currency
Bank deposits

70
Q

For balance of payments to balance…

A

The current account must = capital account
Plus or minus balancing item
And plus or minus central bank reserves

71
Q

What is vital to level of international trade and competitiveness

A

Exchange rate

72
Q

If value of currency rises, what happens to exports

A

Less competitive (unless producers reduce prices) imports cheaper and more competitive

Worsen deficit

73
Q

If value of currency falls what happens to exports

A

They are cheaper, so more competitive, imports more expensive so deficit will see an improvement

74
Q

Budget deficit and national debt

A

What govt owes is National debt

Budget deficit is shortfall between what govt receives in tax and what it spends = Public sector net cash requirement

75
Q

Debt is measured as

A

A % of GDP

76
Q

Public sector net cash requirement

A

Difference each year between govt expenditure and govt income

77
Q

In a buoyant economy…

A

govt spending is less than income with substantial tax due to high employment, which enables govt to reduce borrowing

78
Q

High unemployment has a … impact on govt?

A

Negative
More benefit payments
Less tax income

79
Q

Gig economy

A

One where temporary positions are common
Fewer employment rights

80
Q

Exchange rates

A

Price of one currency against another
Volatile rates can create uncertainty

81
Q

Factors influencing exchange rate volatility

A

Fixed rate system - pegged to a particular currency. Central bank intervenes in currency market to offset demand and supply by spending its reserves
Floating rate system - determined by natural forces of supply and demand, no intervention

82
Q

Examples of exchange rate regimes

A

Target zone
Crawling peg
Managed float

83
Q

What is target zone exchange rate

A

Similar to fixed but exchange rate manager in a band
Means rate can fluctuate and bank will only intervene if limits are breached

84
Q

What is crawling peg exchange rate regime

A

Similar to target zone but is a strategy to move from fixed rate system

85
Q

What is managed float exchange rate system

A

Also known as dirty float
Mainly floating rate but occasional intervention to alter direction of rate

Intro to Securities and Investment (8 decks)

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