Chapter 3 Flashcards
If the annual rate of inflation drops from +1.9% to -1.2% this is an example of…
A. fiscal loosening.
B. disinflation.
C. monetary loosening.
D. deflation.
D
Deflation is the opposite of inflation, i.e. prices are dropping.
Disinflation is where inflation still exists, but it is not as strong as it was in the previous quarter.
The other two potential answers are ‘red herrings’.
The Government wants to address declining Gross Domestic Product (GDP) by using fiscal measures
only. This could be achieved by…
2
A. reducing the target for inflation.
B. increasing the issue of GILTS.
C. reducing interest rates.
D. reducing taxation.
D
Answer D is the only ‘fiscal’ method listed of the four options given.
A reduction in taxation can address falling GDP, as this means that companies could reinvest the tax
savings to improve productivity.
At what stage in the 3 financial cycle is equity growth at its fastest?
A. Recession.
B. Expansion.
C. Boom.
D. Contraction.
B
Equity prices follow the cycle ‘a step ahead’ when it comes to their growth.
So, prices may peak during the boom, but they are at the peak of their growth during the expansion,
fuelled by falling interest rates.
Albert was planning to purchase a conventional GILT one month ago. The clean price at the time was
£107. He had to delay his purchase, and has found that the clean price is now £105. The most likely
reason for this change in price is…
A. inflation is expected to rise.
B. inflation is expected to fall.
C. equity prices have risen steeply.
D. property prices have dropped steeply.
Last
A
If inflation is expected to rise, then interest rates are likely to be raised as well.
As the coupons from gilts are fixed, the only way they can remain competitive for investors is if their
yields rise. The only way that can happen is if their prices fall, as that raises the yield.
Last year, the Government raised £800bn in taxes and public spending was £850bn. This difference
between the Government’s expenditure and revenues is known as:
A. the public sector borrowing requirement.
B. intrinsic value.
C. the bid/offer spread.
D. the public-sector net cash requirement.
D
The PSNCR is the difference between the Government’s expenditure and revenue.
The public sector borrowing requirement is a red herring.
Intrinsic value is a term that articulates the value within a bond.
The bid/offer spread is the difference between the buying and selling prices of equities and bonds.
The Government is concerned about the rate of economic growth and is considering what action to
take. Which of the following will have the biggest and most immediate effect in boosting the
economy?
A. A cut in interest rates.
B. A cut in taxation.
C. An increase in Government borrowing.
D. An increase in Government spending.
D
A cut in interest rates can take up to two years to filter through to the economy. A cut in taxation is
often saved rather than spent.
Spending money puts money into the economy.
Increasing borrowing results in the issue of GILTS and takes money out of the economy.
The Government is concerned about a decline in the number of tourists from abroad visiting the UK.
They are most likely to have seen this trend reflected in…
A. the visible trade within the current account.
B. the invisible trade within the current account.
C. the capital account only.
D. the UK official reserves only.
B
Tourism is a service and not manufacturing, so it is not visible trade.
The capital account contains, amongst other things, sale of property and land to non-UK investors.
The UK reserves are made up of foreign currencies.
How is GDP calculated?
by adding together the total value of all goods and services produced domestically during a calendar year
What is it called when the level of GDP falls compared with the previous quarter?
Contracting
After two successive quarters of declining GDP, is this called?
technical recession’
What is it called when GDP rises compared with the previous quarter?
economy is expanding
Describe what happens during the recession period?
Two consecutive quarters of declining Gross Domestic Product (GDP) puts the
country into recession.
Companies show low profits, and their output is weak. Many have to cease
trading and unemployment rises as a result.
Inflation is low (people aren’t spending) so interest rates are cut (to try to stimulate spending and growth).
The recovery phase is where an economy moves out of recession.
Describe what happens during this phase?
If GDP is higher than the previous quarter, then the economy is expanding.
People start to spend more, as optimism grows.
Profits rise, and interest rates are kept low to stimulate further growth.
Equity growth is at its quickest in this phase.
Inflation remains low but can start to rise.
The period of boom occurs when the economy is growing at its fastest during the overall cycle. Decribe what happens during this phase?
Strong demand justifies rising prices for many products.
Inflation rises as the public spend their new-found wealth. There is a feelgood
factor.
But… the more inflation rises, the more the economy starts to ‘overheat’.
Interest rate rises are necessary to dampen demand and stop the expansion.
The economy is growing at its fastest during the overall cycle.
After the boom stage the economy starts to slow down. Name a few things that might happen during this period?
As the economy starts to slow down, sales slow but inflation remains high.
Central banks are reluctant to cut interest rates.
Consumers become more cautious, and start to delay major purchases causing problems for companies and unemployment rises.
