Chapter 2 - The Economic environment Flashcards
What is a state-controlled economy
The state decides on what is produced and distributed.
- known as a Planned/Command economy
- raises large inequity and removes individual choice. But could mean less employment.
What is a Market economy
The supply and demand decides what is produced and distributed. The price of goods and services, and labour wages are made by S+D.
What is a mixed economy
includes both elements of state controlled and markets economy. the government are in charge of welfare systems, and schools, hospitals etc. Taxes.
What is an Open economy
Promotes trades between different countries. The World Trade Organisation advocates for this.
what is the role of the government
The government manage the economy through taxation, monetary policy, and a fiscal policy
What is a fiscal policy
the governments spending/collecting taxation money to influence the overall economy
How does the government influence spending through budgets?
Balance budget - expenditure and income are equal
Deficit budget - expenditure exceeds income
Surplus - Income exceeds expenditure
How does the government influence spending by taxation
Less tax = more disposable income= increases demand
more taxes = less disposable income= reduces demand
how does the government deal with a deficit budget
the government will have to borrow money. This is called a Public sector borrowing requirement (PSBR)
What is a macroeconomic policy
Management of the economy by managing the performance and behaviour of the economy.
What are the 4 main macroeconomic objectives
Full employment
Economic Growth
Low inflation - aims to be at 2%
Balance of payments equilibrium
what is the economic cycle
Peak - GDP is at its highest
Contraction - GDP is declining (two consecutives quarters of negative GDP = recession)
Trough - GDP at its lowest
Expansion - GDP starts rising
What are the implications of a fiscal policy
Businesses - able to plan their output levels, employment levels and investments.
Costs - if indirect taxes raise, such as VAT, firms will have to absorb this, or passed onto customers.
What is a monetary Policy
The regulations of an economy through interest rates, Credit availability, and money supply.
How does the monetary policy regulate these
Money supplies - Governments may reduce the amount of credit borrowed to reduce spending
Interest - if high interest rates, people will be inclined to save, less borrowing, mortgages payments increase.
What is a central bank
operates at the very centre of a nations financial system. example = Bank of England
what is a central banks responsibilities?
- Acting as a lender, taking deposits from, and lending to commercial banks
- Acting as a banker to the government
- Manages the national debt
- Acting as a lender in financial crisis
- setting the short-term interest rate
- controlling the money supply
- Holding nations gold
- influences the value of the nations currency
- providing depositors protection schemes
What is the role of the Bank of England
Our central bank, acts as a banker to the banking system and the government. It manages the UK foreign exchange and gold reserves.
What are the two main purposes of the BoE
Monetary stability - stable prices , all about meeting the governments inflation rates, which is 2% CPI target
Financial stability - detecting and reducing risks to the financial systems.
What are the two things the BoE does not do
Manages the national debt - done by the DMO
Provides depositors protection schemes - done by the Financial services compensation schemes (FSCS)
What is the Monetary policy committee (MPC) responsible for?
- Setting interest rates. this decision is made by the nine members within the MPC.
- Ensure inflation is kept within the government range by setting a base rate. At the MPC monthly meetings, they discuss factors that influence this, consumers spending or borrowing, levels of exchange rates, wage inflation.
- Formulating monetary policy within the bank
What does the HM Treasury representative do within the MCP?
They discuss policy issues, ensure the MPC is educated with developments in the fiscal policy. They aren’t allowed to vote in meetings.
What do the Financial Policy Committee do?
Created in 2011 in response to the financial crash. The government created a new committee, FPC, to monitor the stability and resilience within the UK financial system.
The main responsibilities of the FPC
Gives directions and recommendations to the Prudential regulations authority (PRA) and the financial conduct authority (FCA), they then are able to make banks, building societies and other investment firms. Also are responsible to make general recommendations to other bodies.
What is the Prudential Regulation Authority (PRA)
the PRA is a part of the BoE and has the responsibility for the supervision of banks and key market infrastructure firms
what is the purpose of the federal reserve system?
Comprises 12 regional federal reserve banks, they monitor the activities of, and provide liquidity to banks in their regions.
who governs the federal reserve
there are 7 members, who the president appoints. these 7 members, the president, and the 12 regional federal regional banks makes up the federal open market committee (FMOC), who examines economic data.
Benefits of the federal reserve bank
they have helped many US banks, preventing widespread panic, and systematic risks, also known as “contagion”
What is the European central bank and responsibilities.
Based in Frankfurt. Mains responsibilities is setting the monetary Policy for the whole Eurozone zone. It keeps inflation close to 2% or below, and overall, maintains price stability.
How is the ECB ran?
the president and council sets the monetary policy. it is meant to act independently, but has fallen into political persuasion. It has has been forced to act as a banker to struggling countries in eurozone
What is the SSM and the aims.
Single Supervisory Mechanism, framework in Europe, with the aims of ensuring the safety and soundness of the European Banking system, and increase financial integration and stability in Europe.
How is inflation measured
Measured by the Office for National statics by looking at 700 shopping basket items (ONS). Looks at:
- CPI (the changes in prices to estimate how price of goods and services change overtime)
- CIPH (same data as CPI, but takes into account housing costs)
- RPI (tracks price changes in average goods)
How does GDP contribute to economic data, and how is it measured.
GDP is how much output is produced and calculated quarterly. This is measured in three ways:
- By the total income paid by firms to individuals
- By individuals total expenditure on firms output
- By the value of total output generate by firms
Balance of payments
summary of transactions between the UK and other countries.
- if imports higher than exports - balance deficits
- if exports higher than exports - balance surplus
the main components in balance of payments
Trade Balance
Current account
Capital account
Trade balance
- visible trade balance - difference between value of imports and exports of goods
- invisible trade balance - difference between value of imports and exports of services
Current account
- calculates the total value of goods and services that flow in and out of the country
- this provides details of balance of a trade a country has with the rest of the world.
Capital account
- records international capital transactions related to business, real estate, bonds and stock.
FOR BALANCE TO BALANCE = current account must equal capital account
the two types of debt which are economic factors
Government debt = what the government owes
Budget Deficit - expenditure exceeds income
how does the exchange rates impact the economy?
Volatile exchange rates create a great deal of uncertainty and affect economic activity as well as investment decisions.
Fixed-rate system - Central bank intervene in forces of supply and demand.
Floating-rate system - determined by supply and demand.
