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

Chapter 2 - The Economic Environment 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
In respect of interest rates it is assumed…
There’s a direct relationship between interest rate and level of spending in economy
26
An increase in interest rates is thought to discourage spending. Explain this and explain the argument against why this may not happen
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
27
Role of central banks
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
28
Government usually implement their monetary policy using
Central banks
29
Bank of England is the central bank of UK and was founded in 1964. Name/explain it’s 2 core functions
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
30
Who are interest rate decisions made by?
Monetary policy committee
31
Who is monetary policy committee made up of?
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
32
What is the monetary policy committees main focus
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
33
What is quantitative easing objective?
To inject cash directly into the economy to stimulate demand and return to inflation target
34
What was the worry when quantitative easing was introduced
Worry about falling into a deflationary spiral
35
What does quantitative easing involve?
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
Injecting more money into the economy through the purchase of bonds can mean
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
Theory of quantitative easing
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
Unwinding Quantitative Easing = Quantitative Tightening
Done by banks stopping reinvestment or selling bonds. Should have effect of raising interest rates and lowering inflation
39
Quantitative easing and tightening are most powerful when
Markets are stressed
40
Purpose of preserving financial stability
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
What is financial policy committee tasked with?
Monitoring the stability and resilience of the UK financial system Gives direction to the prudential regulation authority (PRA) and the FCA
42
What is the Prudential Regulation Authority (PRA)?
Part of BOE and has assumed responsibility of supervision of banks
43
Financial policy committee
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
Bank of England doesn’t manage national debt true or false?
True It is the debt management office (DMO)
45
Depositors protection scheme is operated by…
Financial services compensation scheme
46
The federal reserve
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
Federal open market committee
Chairman appointed by US president Meet every 6 weeks to examine latest data
48
European Central Bank
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
The single supervisory mechanism main aims
Ensure safety and soundness of Eu banking system Increase financial integration and stability Important milestone toward banking union jn Eu
50
Key economic factors
Inflation GDP Economic and growth cycles Balance of payments Unemployment Exchange rates
51
Inflation
Persistent increase in level of prices Excess demand Scarcity of resources Increase in government spending Most western governments aim for 2-3% PA
52
High levels of inflation can cause
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
Positives of high inflation
Raising house prices Borrowers will benefit as real value of debt falls Erodes country’s national debt in real terms
54
Deflation
General fall in price levels Can spiral where it creates vicious circle of reduced spending and reluctance to borrow
55
Measuring inflation
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
Office for National statistics
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
Annual rate of inflation
Percentage change in latest index compared with the value recorded 12 months previously
58
Gross domestic product
Most commonly used measure of a country’s output
59
Calculation of GDP
Consumer spending + government spending + investment + exports - imports = GDP
60
Economic growth mainly depends on
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
Mature economy labour force growth
1% PA
62
Long term productivity dependent on
Education, training, utilisation of labour etc
63
Balance of payments
Summary of all transactions between uk and rest of world
64
Balance of payments deficit is
If uk imports more than it exports
65
Balance of payments surplus
If uk exports more than it imports
66
3 main parts of balance of payments
Trade balance Current account Capital account
67
Trade balance is
Difference between value of imported and exported Visible is raw materials Invisible is banking and tourism
68
Current account
Total value of goods and services that flow in and out
69
Capital account
Records international transactions related to investment in business Categories include: Foreign direct investment Portfolio investment Currency Bank deposits
70
For balance of payments to balance…
The current account must = capital account Plus or minus balancing item And plus or minus central bank reserves
71
What is vital to level of international trade and competitiveness
Exchange rate
72
If value of currency rises, what happens to exports
Less competitive (unless producers reduce prices) imports cheaper and more competitive Worsen deficit
73
If value of currency falls what happens to exports
They are cheaper, so more competitive, imports more expensive so deficit will see an improvement
74
Budget deficit and national debt
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
Debt is measured as
A % of GDP
76
Public sector net cash requirement
Difference each year between govt expenditure and govt income
77
In a buoyant economy…
govt spending is less than income with substantial tax due to high employment, which enables govt to reduce borrowing
78
High unemployment has a … impact on govt?
Negative More benefit payments Less tax income
79
Gig economy
One where temporary positions are common Fewer employment rights
80
Exchange rates
Price of one currency against another Volatile rates can create uncertainty
81
Factors influencing exchange rate volatility
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
Examples of exchange rate regimes
Target zone Crawling peg Managed float
83
What is target zone exchange rate
Similar to fixed but exchange rate manager in a band Means rate can fluctuate and bank will only intervene if limits are breached
84
What is crawling peg exchange rate regime
Similar to target zone but is a strategy to move from fixed rate system
85
What is managed float exchange rate system
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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