Economy Flashcards by Angela Geraghty

Causes of inflation?

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

Boom

Slowdown/contraction

Recession

Recovery/expansion

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What increases during a boom?

Demand
Prices
Profits
Employment
GDP
Sterling

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What decreases during a recession?

Demand
Prices
Profits
Employment
GDP
Sterling

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

Raise interest rates

Decrease money supply

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

Reduce interest rates

Increase money supply

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

Decrease taxes

Increase public spending

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

Increase taxes

Decrease public spending

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What is Disinflation?

Decrease in rate of inflation

Prices rising but at a slowing rate

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What is Inflation?

Prices are rising

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What is Deflation?

Prices declining over time and inflation becomes negative

Consumers defer purchases and manufactures reduce output

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What is Reflation?

Inflation low and rising

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What is the effect of disinflation on Equities & Bonds?

Equity prices go up

Bond yields fall

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What is the effect of inflation on Equities & Bonds?

Equity prices go down

Bond yields rise

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What is the effect of deflation on Equities & Bonds?

Equity prices go down

Bond yields fall

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What is the effect of reflation on Equities & Bonds?

Equity prices go up

Bond yields rise

What is inelastic demand?

Change in price has little or no effect on demand

Essential services - can’t easily be cutback - utilities

What is perfect competition?

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

What is Oligopoly?

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

What determines if business cycle is in Recovery/Expansion?

GDP risen compared to last quarter

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

GDP Fallen compared to last quarter

What is the PSNCR?

Public Sector Net Cash Requirement

Difference between Governments expenditure and revenue (normally deficit)

What is M0 in terms of money supply?

Narrow money

Notes and coins in circulation + Bank of England operational deposits

indicator of consumer spending/retail sales

What is M4 in terms on money supply?

Broad Money

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

Indicator of economy

What is stagflation?

Combo of stagnant growth and inflation

What is a country's current account ?

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

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

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

What is a country's capital account ?

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

What is a capital account deficit and surplus?

Surplus = overseas investors invest more money in country than UK investors invest overseas Deficit - opposite

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

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

6 reasons to keep interest rates low

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

Effect of four stages of economic cycle on share prices

Boom - topped out and starting to falter Slowdown - falling Recession - bottom out and start to recover Recovery - prices increase strongly

What are the core purposes of Bank of England?

Monetary Stability - stable prices and confidence in currency Financial stability - efficient flow of funds within economy and confidence in financial intermediaries

What is velocity of M4?

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

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

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 ```

Why can't use Money Supply not suitable benchmark?

Economic not financial | Not a measure of return

How can BOE decrease money supply?

Selling securities Reduces velocity of money Reduces purchasing power

Reasons for fall in interest rates?

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