Economic Environment

Question 1

Explain circular flow of income

Answer 1

1. 2 groups - individuals and firms
2. Individuals supply land labour and capital
3. Firms supply outputs

Question 2

Explain GDP

Answer 2

1. Gross Domestic Product
2. Indicator of economic activity
3. Total value of all goods and services produced domestically in a calendar year

Question 3

Explain Economic Cycle

Answer 3

1. Recovery
2. boom
3. contraction/slowdown
4. recession

Question 4

What is the Public Sector Net Cash Requirement

Answer 4

1. Difference between govts. expenditure and receipts

Question 5

How do interest rates move in line with economic cycle

Answer 5

1. When economy slowing - interest rates reduced
2. When expanding - interest rates increase to slow the economy

Question 6

What is Balance of payments

Answer 6

1. record of a countries trade transactions with the rest of the world in terms of receipts and payments

Question 7

What is the current account in relation to balance of payments

Answer 7

1. imports and exports including:
   -Trade in goods
   
   • Trade in services
   • investment income
   • Transfer payments (overseas aid)

Question 8

What is the capital and financial account in relation to balance of payments

Answer 8

1. movement of money into and out of the country for investment.

Question 9

What is fiscal policy

Answer 9

1. the use of government spending and taxation to influence both demand and the level of economic activity

Question 10

What is Monetary Policy

Answer 10

1. Attempts to stabilise the economy by controlling interest rates and the
   supply of money.

Question 11

What are the 2 measures of Money supply

Answer 11

1. M0 Narrow Money - notes, coins and banks operational deposits
2. M4 Broad Money - all of the above plus all instant access and time deposit accounts of UK residents

Question 12

What is Quantitative easing

Answer 12

1. injecting money into the economy by repurchasing govt. bonds

Question 13

What is Quantitative tightening?

Answer 13

1. banks sell the bonds previously acquired under QE and/or allow their holdings to mature without replacement.

Question 14

Explain CPI

Answer 14

1. average change from month to month in the prices of goods and
   services
2. Main inflation measure used

Question 15

What is Disinflation

Answer 15

1. a decrease in the rate of inflation

Question 16

What is Deflation

Answer 16

1. opposite of inflation
2. prices are going down over time