Economic Environment

Question 1

What is the BODMAS approach to an equation?

Answer 1

Brackets First
Orders (powers/square roots)
Division
Multiplication
Addition
Subtraction

Question 2

What are the positive and negative effects of globalisation in the uk?

Answer 2

Negative impact on employment prospects of low skilled workforces

Investors may be able to benefit by investing in companies that are utilising cheaper global workforces to reduce operating costs

Question 3

Upswing/Recovery/expansion - GDP has risen in relation to the last economic quarter

Answer 3

Prices of equities start to rise
Costs of fixed interest securities rise whilst they represent good returns compared to mkt rates
People spend more as optimistic
Buz sales increase due to demand
Company profits rise
Inflation and interest rates remain low
PSNCR deficit falls (public sector net cash requirement)

Question 4

Boom - economy is growing at its fastest during economic cycle

Answer 4

Prices and inflation start to rise
BOE increased interest rates
Equity prices start to falter as interest rate rises affect company profits
Yields from fixed interests need to be higher to remain competitive, so prices will fall

Question 5

What economic indicators are often used to identify the phase of the economic cycle?

Answer 5

GDP, unemployment rate, and inflation.

Question 6

What is a recession?

Answer 6

A significant decline in economic activity across the economy lasting longer than a few months.

Question 7

What term describes a prolonged period of economic contraction?

Answer 7

Depression.

Question 8

What is the role of monetary policy in the economic cycle?

Answer 8

To influence economic activity through interest rates and money supply.

Question 9

Which phase of the economic cycle is often associated with increased consumer confidence?

Answer 9

Expansion.

Question 10

How can government spending affect the economic cycle?

Answer 10

It can stimulate growth during contractions or slow down an overheating economy during expansions.

Question 11

Contraction/Slowdown - GDP has fallen in relation to the last economic quarter

Answer 11

Output growth slows down
Inflation stays high and sales start to drop
Unemployment rises, more firms go bust
Equity prices fall due to higher interest rates and lower profits
Investors look at fixed interest as they start to represent better risk

Question 12

Recession - GDP has fallen for 2 successive quarters

Answer 12

Gov may increase spending or cut tax to stimulate growth
Output growth is sluggish and profits poor
Inflation and interest rates are falling
High unemployment and buz failures
PSNCR will grow
Cost of fixed interest starts to rise as investors want a fixed return

Question 13

Identify stages of economic cycle

Answer 13

Recession
Recovery
Boom
Slow down

Question 14

What is MO ‘Narrow money’

Answer 14

Notes and coins in circulation PLUS operational deposits held by banks with the Bank of England

Question 15

What is M4 ‘Broad money’

Answer 15

All of MO PLUS all instant access account funds with UK banks and b/s PLUS
instant access and timed deposits of UK residents with UK banks and b/s

Question 16

The BOE wants to reduce money supply so they….

Answer 16

Offer new Gilts at attractive rates
The public buy these so M4 is reduced as is money supply

Question 17

The BOE wants to increase money supply they…

Answer 17

Buy back Gilts at attractive rates
The public sell these so M4 is increased as is money supply

Question 18

What are the effects of inflation?

Answer 18

Delays in production as supply can’t keep up with demand
Increases in demand for imported goods and services
Increases in wage demands
Rises in interest rates
Cuts in public expenditure
Tax increases
Devaluation of sterling
Reduction in exports

Question 19

State 4 ways which a low BOE base rate may stimulate consumer spending

Answer 19

Reduced savings rate may reduce incentive to save
Low rates will mean cheaper borrowing/lower mtg costs
This gives more disposable income
Increases wealth/feel good factor

Question 20

Explain how BOE could reduce money supply and state effect on interest rates

Answer 20

BOE could reduce money supply by selling securities
This would increase the supply of securities and reduce velocity of money
This reduces price of securities
Leading to higher yields and so interest rates would rise

Question 21

What are the main credit risks?

Answer 21

Default risk
Downgrade risk
Credit spread risk
Counterparty risk
Bail-in risk

Question 22

What is earnings growth?

Answer 22

Measures increase in average employment earnings

Question 23

What is GDP?

Answer 23

Measure of total output of goods and services

Question 24

What does CPI measure?

Answer 24

Change in prices of a basket of consumer goods and services

Question 25

What does Producer Prices Indices measure?

Answer 25

Prices of goods bought and sold by UK manufacturers

Question 26

What does Purchasing Managers Index measure?

Answer 26

health of manufacturing sector

Question 27

Types of Economic Indicator

Answer 27

Leading indicators - ie stockmarkets, usually change before economy changes as a whole
Coincident indicators - ie GDP, retail sales, change at same time as economy
Leggings indicator - ie unemployment, change after economy changes

Question 28

Economic Cycle - RECESSION - what happens during this phase?

Answer 28

Inflation low
Interest rates low
Equity prices low but start to rise
Fixed interest prices high due to demand

Question 29

Economic cycle - UPSWING/RECOVERY/EXPANSION, what happens during this phase

Answer 29

Inflation low but starting to rise
Interest rates remain low
Equities rise at fastest rates
Fixed interest prices high but start to fall

Question 30

Economic cycle SLOWDOWN, what happens in this phase?

Answer 30

Inflation high
Interest rates high but start to fall
Equity prices falling at fastest rates
Fixed interest prices low but start to rise

Question 31

Economic cycle BOOM, what happens in this phase?

Answer 31

Inflation high
Interest rates high
Equity prices peak and start to fall
Fixed interest prices low

Question 32

What does Fiscal Policy cover?

Answer 32

Public sector spending (NHS, schools, infrastructure)

Taxation rates

To boost economy spending is increased and taxation is cut

Set by government, controlled by treasury

Question 33

What does Monetary Policy cover (MPC)?

Answer 33

Interest Rates (increases/decreases in bank base rate)
Money supply (amount of liquidity in the market)

To boost economy interest rates are decreased and money supply increased

Question 34

What influences inflation?

Answer 34

Consumer demand
Rising demand leads to higher prices and inflation
Falling demand leads to lower prices and disinflation or deflation

Question 35

What is Disinflation?

Answer 35

The increase in prices but at a slower rate than before

Question 36

What is Deflation?

Answer 36

A fall in prices, negative inflation

Question 37

What are the official measures of inflation?

Answer 37

CPI Consumer Prices Index - the official measure used by MPC to consider rises/falls in bank base rate
RPI Retail Prices Index - Includes housing costs, used in many investment products including index linked gilts

Question 38

What are the impacts of interest rates

Answer 38

High interest rates help savers but negatively effect companies profits and vice versa
Low interest rates help borrows and make fixed interest securities more appealing and vice versa

9 members of the MPC vote 8 times a year to set base rate

Question 39

What are the impacts of exchange rates

Answer 39

A fall or rise in sterling will have an impact on importers and exporters and investors in non-sterling shares

A rise in sterling strengthens the pound
A fall in sterling weakens the pound

A rise in the value of the pound benefits importers as their pound buys more foreign currency

A fall in the value of the pound benefits exporters as their goods and services appear cheaper to foreign consumers.

A strong pound benefits investors when buying equities traded in foreign currency as when they convert sterling to the currency they receive more for the pound

A weak pound helps investors when they convert back to £ as they get more pounds