Chapter 8 - Economic environment Flashcards
1
Q
the main factors that caused the 2008-09 financail crisis
A
- limited restrictions on lending
- securitisation of debts
- a prolonged period of low interest rates
2
Q
strong currency and it’s effects
weak currency and it’s effects
A
- strong - lower import costs and domestic inflation
- weak - higher import costs and domestic inflation
3
Q
fiscal policy
increase in spend vs decrease in taxation
behaviour changes - individuals and companies
A
- short term effect on the economy from altering the levels of goverment spending and taxation
- in a recession - may increase spending or cut taxation to stimulate demand
- in a boom - may reduce spending or increase taxation to dampen demand
increase (spend) vs decrease (tax)
- increase has more of an impact than a decrease in taxation of the same amount. a bulk of the increase will be spent on domestically produced goods and services
- in contrast, tax cuts are used to buy more imports, that reduction is saved rather than spent
behaviour changes - individuals and companies
- individual - tax treatment of different assets will influence investment decesions
- company - tax treatment of earnings will affect it’s dividend policy, and the choice of raising capital through debt or equities
4
Q
real exchange rates
rate rises
rate falls
A
- measures the price of domestically produced goods relative to the price of foreign goods, taking into account the exchange rate - indicator of competitveness
- if the rate rises, domestic goods become more expensive relative to foreign goods, adversely affecting production
- if the rate falls, domestic goods become relatively cheaper and demand for them increases
5
Q
balance of payments
A
- record of countrys trade transactions with the rest of the world, measured in terms of receipts and payments
- reciept - sterling flowing in, or any transaction that requires the exchange of foreign currency for sterling (foreign into sterling)
- payment - sterling flowing out, or any transaction that requires the conversion of sterling into some other currency (sterling into foreign
6
Q
globalisation
effects of it
A
- a global economy in which consumers can buy goods from anywhere in the world
effects
- investors can take advantage by investing in foregin markets or in companies with large oversea operations
- disadvantage to low-skilled, labour-intensive industries in the developed world that compete with developing companies
- presence in non manufacturing sectors. i.e., call centeres in india or admnistartive work amd softaware dev
7
Q
current account
four parts
meaning of deficit
A
- transactions in goods (visible trade) and services (invisible trade)
- balance is the net balance of trade in goods and services, plus net receipts from income-generating assets following into the UK
comprises of four parts
- trade in goods - exports and imports of products
- trade in services - exports and imports of services
- primary income - wages and salaries earned by UK residents from other countries, investment income, taxes and rent
- secondary income - overseas aids and payments to and from EU institutions
deficit
- UK usually runs a deficit in goods and secondary income. this is partially offset by a surplus in services and investment income
- a deficit means more goods and services have been imported into the UK than have been sold abroad. a surplus means the opposite is true
8
Q
monetary policy
M0
M4
A
- attempts to stabilise the economy by controlling interest rates and the supply of money
M0 ‘narrow’ - notes and coins, plus banks operational deposits with BOE.
- indicator of consumer spending and retail
- growth shows spending is buoyant
- contraction shows spending is cautious
M4 ‘broad’ - notes and coins, plus all instant access and time deposit accounts of UK residents
- includes deposits created by banks and building societies through their lending activities, as well as deposits by savers
- increase in demand for loans will be reflected in faster M4 growth
