Chapter 2 - The Economic environment Flashcards

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1
Q

What is a state-controlled economy

A

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.

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2
Q

What is a Market economy

A

The supply and demand decides what is produced and distributed. The price of goods and services, and labour wages are made by S+D.

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3
Q

What is a mixed economy

A

includes both elements of state controlled and markets economy. the government are in charge of welfare systems, and schools, hospitals etc. Taxes.

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4
Q

What is an Open economy

A

Promotes trades between different countries. The World Trade Organisation advocates for this.

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5
Q

what is the role of the government

A

The government manage the economy through taxation, monetary policy, and a fiscal policy

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6
Q

What is a fiscal policy

A

the governments spending/collecting taxation money to influence the overall economy

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7
Q

How does the government influence spending through budgets?

A

Balance budget - expenditure and income are equal
Deficit budget - expenditure exceeds income
Surplus - Income exceeds expenditure

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8
Q

How does the government influence spending by taxation

A

Less tax = more disposable income= increases demand
more taxes = less disposable income= reduces demand

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9
Q

how does the government deal with a deficit budget

A

the government will have to borrow money. This is called a Public sector borrowing requirement (PSBR)

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10
Q

What is a macroeconomic policy

A

Management of the economy by managing the performance and behaviour of the economy.

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11
Q

What are the 4 main macroeconomic objectives

A

Full employment
Economic Growth
Low inflation - aims to be at 2%
Balance of payments equilibrium

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12
Q

what is the economic cycle

A

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

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13
Q

What are the implications of a fiscal policy

A

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.

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14
Q

What is a monetary Policy

A

The regulations of an economy through interest rates, Credit availability, and money supply.

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15
Q

How does the monetary policy regulate these

A

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.

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16
Q

What is a central bank

A

operates at the very centre of a nations financial system. example = Bank of England

17
Q

what is a central banks responsibilities?

A
  • 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
18
Q

What is the role of the Bank of England

A

Our central bank, acts as a banker to the banking system and the government. It manages the UK foreign exchange and gold reserves.

19
Q

What are the two main purposes of the BoE

A

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.

20
Q

What are the two things the BoE does not do

A

Manages the national debt - done by the DMO
Provides depositors protection schemes - done by the Financial services compensation schemes (FSCS)

21
Q

What is the Monetary policy committee (MPC) responsible for?

A
  • 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
22
Q

What does the HM Treasury representative do within the MCP?

A

They discuss policy issues, ensure the MPC is educated with developments in the fiscal policy. They aren’t allowed to vote in meetings.

23
Q

What do the Financial Policy Committee do?

A

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.

24
Q

The main responsibilities of the FPC

A

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.

25
Q

What is the Prudential Regulation Authority (PRA)

A

the PRA is a part of the BoE and has the responsibility for the supervision of banks and key market infrastructure firms

26
Q

what is the purpose of the federal reserve system?

A

Comprises 12 regional federal reserve banks, they monitor the activities of, and provide liquidity to banks in their regions.

27
Q

who governs the federal reserve

A

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.

28
Q

Benefits of the federal reserve bank

A

they have helped many US banks, preventing widespread panic, and systematic risks, also known as “contagion”

29
Q

What is the European central bank and responsibilities.

A

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.

30
Q

How is the ECB ran?

A

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

31
Q

What is the SSM and the aims.

A

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.

32
Q

How is inflation measured

A

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)

33
Q

How does GDP contribute to economic data, and how is it measured.

A

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

34
Q

Balance of payments

A

summary of transactions between the UK and other countries.
- if imports higher than exports - balance deficits
- if exports higher than exports - balance surplus

35
Q

the main components in balance of payments
Trade Balance
Current account
Capital account

A

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

36
Q

the two types of debt which are economic factors

A

Government debt = what the government owes
Budget Deficit - expenditure exceeds income

37
Q

how does the exchange rates impact the economy?

A

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.

38
Q
A