Economy Flashcards
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
What are the 4 stages of the economic/business cycle?
Boom
Slowdown/contraction
Recession
Recovery/expansion
What increases during a boom?
Demand Prices Profits Employment GDP Sterling
What decreases during a recession?
Demand Prices Profits Employment GDP Sterling
How might the government respond with monetary policy in a boom?
Raise interest rates
Decrease money supply
How might the government respond with monetary policy in a recession?
Reduce interest rates
Increase money supply
How might the government respond with fiscal policy in a recession?
Decrease taxes
Increase public spending
How might the government respond with fiscal policy in a boom?
Increase taxes
Decrease public spending
What is Disinflation?
Decrease in rate of inflation
Prices rising but at a slowing rate
What is Inflation?
Prices are rising
What is Deflation?
Prices declining over time and inflation becomes negative
Consumers defer purchases and manufactures reduce output
What is Reflation?
Inflation low and rising
What is the effect of disinflation on Equities & Bonds?
Equity prices go up
Bond yields fall
What is the effect of inflation on Equities & Bonds?
Equity prices go down
Bond yields rise
What is the effect of deflation on Equities & Bonds?
Equity prices go down
Bond yields fall
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
