Economic and Financial Environment

Question 1

Macroeconomic policy

Answer 1

Full employment
Price stability - low inflation, maintain AD`
Economic growth
Balance of payments - payments surplus (export value higher than imports)
Appropriate distribution of wealth (depends on political sentiment)

Question 2

Monetary policy

Answer 2

Concerned with influencing:
Supply of money and the price of money (raising interest rates)

Question 3

Monetary Policy on businesses

Answer 3

Controlling supply of money:
Small businesses can struggle to raise funds
Reduced supply pushes up the cost of funds (interest)
Too difficult to raise funds to spend for customers

Raising interest rates:
Shareholders require higher rates of return vs investing for interest. Without the increase, share price can fall
Saving becomes attractive for customers

High interest rates attract foreign investment, and increases exchange rates in the short term (increased demand for currency)

Imports become cheaper, exports become dearer

Question 4

Monetary policy impact on inflation

Answer 4

Demand pull inflation (excess demand):
If interest rates are lowered, people spend more, increased demand can’t be met and therefore prices rise

Cost push inflation (higher costs)
Lowering interest rates can decrease demand for the currency and the exchange rate. Imports become more expensive, production costs go up and suppliers increase prices

Question 5

Fiscal policy

Answer 5

Manipulation of government budget to control aggregate demand

Includes:
Government spending (healthcare, benefits, businesses)
Taxation
Government borrowing (repayment of govt debt)

Question 6

Fiscal policy funding

Answer 6

Government spending is funded by taxes or borrowing
Govt must find a balance
Balanced budget = total expenditure matched by total tax income
Deficit = expenditure exceeds tax income
surplus = expenditure is less than tax income

Question 7

Govt intervention and regulation

Answer 7

Competition policy = standard pricing unless value added
Public provision and regulation
Green policies
Corporate governance (e.g. EDs and NEDs, renumeration committees - the system by which companies are directed and controlled