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1. AF4 > Economy > Flashcards

Economy Flashcards

1
Q

Causes of inflation?

A

Demand Pull - Demand up

Cost Push - Rising cost of raw materials

Imported inflation - Fall in £ against currency importing raw material from

Wage increases - costs of employment

Lack of supply/lack of capacity

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2
Q

What are the 4 stages of the economic/business cycle?

A

Boom

Slowdown/contraction

Recession

Recovery/expansion

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3
Q

What increases during a boom?

A 
Demand
Prices
Profits
Employment
GDP
Sterling
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4
Q

What decreases during a recession?

A 
Demand
Prices
Profits
Employment
GDP
Sterling
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5
Q

How might the government respond with monetary policy in a boom?

A

Raise interest rates

Decrease money supply

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6
Q

How might the government respond with monetary policy in a recession?

A

Reduce interest rates

Increase money supply

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7
Q

How might the government respond with fiscal policy in a recession?

A

Decrease taxes

Increase public spending

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8
Q

How might the government respond with fiscal policy in a boom?

A

Increase taxes

Decrease public spending

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9
Q

What is Disinflation?

A

Decrease in rate of inflation

Prices rising but at a slowing rate

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10
Q

What is Inflation?

A

Prices are rising

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11
Q

What is Deflation?

A

Prices declining over time and inflation becomes negative

Consumers defer purchases and manufactures reduce output

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12
Q

What is Reflation?

A

Inflation low and rising

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13
Q

What is the effect of disinflation on Equities & Bonds?

A

Equity prices go up

Bond yields fall

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14
Q

What is the effect of inflation on Equities & Bonds?

A

Equity prices go down

Bond yields rise

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15
Q

What is the effect of deflation on Equities & Bonds?

A

Equity prices go down

Bond yields fall

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16
Q

What is the effect of reflation on Equities & Bonds?

A

Equity prices go up

Bond yields rise

17
Q

What is inelastic demand?

A

Change in price has little or no effect on demand

Essential services - can’t easily be cutback - utilities

18
Q

What is perfect competition?

A

All firms have identical products

Large number of firms

Firms are small in relation to the market

No exit/entry barriers

Market transparent/all transactions known

19
Q

What is Oligopoly?

A

State of limited competition - market shared by small number of producers or sellers

20
Q

What determines if business cycle is in Recovery/Expansion?

A

GDP risen compared to last quarter

21
Q

What determines if business cycle is in Slowdown/Contraction??

A

GDP Fallen compared to last quarter

22
Q

What is the PSNCR?

A

Public Sector Net Cash Requirement

Difference between Governments expenditure and revenue (normally deficit)

23
Q

What is M0 in terms of money supply?

A

Narrow money

Notes and coins in circulation + Bank of England operational deposits

indicator of consumer spending/retail sales

24
Q

What is M4 in terms on money supply?

A

Broad Money

Notes and coins in circulation plus all instant access and time deposits

Indicator of economy

25
Q

What is stagflation?

A

Combo of stagnant growth and inflation

26
Q

What is a country’s current account ?

A

Records imports and exports and services

Exports = a credit (receipt)
Imports = a debit (payment)

balance = net balance of trade in goods and services + net receipts from income generating assets flowing into UK from overseas

27
Q

What is a deficit and surplus in the country’s current account?

A

Deficit = More goods and services have been imported into the UK than sold overseas (exported)) = weaker sterling

Surplus = More good exported than imported = Stronger sterling

28
Q

What is a country’s capital account ?

A

Records all movement of money in and out of country for investment. Investment from UK to other countries and investment from overseas into UK

Includes real assets - land/buildings and financial assets - shares, bonds and loans

29
Q

What is a capital account deficit and surplus?

A

Surplus = overseas investors invest more money in country than UK investors invest overseas

Deficit - opposite

30
Q

What happens if there is a net deficit on current and capital accounts combined?

A

Bank of England may intervene in currency markets to prevent worsening of adverse effect on balance of payments.

official reserves of foreign currencies owned by BOE will be used to finance it

31
Q

6 reasons to keep interest rates low

A

Reduce cost to borrow - co.

Afford to invest - co.

Make more profit as paying less in loans - increased share price

£ drops benefits exporters as cheaper product

Cost to borrow cheaper for individuals -spend more disposable income

Stimulus to housing market

Lower government borrowing costs more money for public spending

32
Q

Effect of four stages of economic cycle on share prices

A

Boom - topped out and starting to falter

Slowdown - falling

Recession - bottom out and start to recover

Recovery - prices increase strongly

33
Q

What are the core purposes of Bank of England?

A

Monetary Stability - stable prices and confidence in currency

Financial stability - efficient flow of funds within economy and confidence in financial intermediaries

34
Q

What is velocity of M4?

A

Lending spent by bank customers placed back on deposit by retailers and then relent to institutions.

Velocity is rate of turnover of this

MPC attempts to control this with monetary policy

Increasing velocity of M4 stimulates demand - easing monetary policy

35
Q

What can lead to increase and reduction in strength of sterling?

A

Increase
High UK Interest rates (relative to other countries)
Increasing GDP
Current account surplus - high demand for UK goods overseas
Low UK inflation (Relative)

Reduction
Low UK Interest rates
Reducing productivity
Current account deficit
High UK inflation
36
Q

Why can’t use Money Supply not suitable benchmark?

A

Economic not financial

Not a measure of return

37
Q

How can BOE decrease money supply?

A

Selling securities

Reduces velocity of money

Reduces purchasing power

38
Q

Reasons for fall in interest rates?

A 
Economic activity/recession
Fiscal surplus
Monetary policy loosening 
Reduction in inflation expectations
Quantitative easing
Safe haven appeal
Demand for sterling

1. AF4 (21 decks)

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