Financial Management Environment (2) Flashcards

1
Q

Why are macroeconomic policies adopted?

A

To achieve full employment, acceptable distribution of wealth, enhance growth

(Anything whole society)

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2
Q

What is monetary policy?

A

How governments achieve economic objectives using moentary instruments

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3
Q

What is a financial instrument?

A

A contract for a monetary asset

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4
Q

Monetary policy actions?

A

Reduce demand of money through interest rates

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5
Q

Effect of increase in interest rate?

A

Increases the cost of borrowing

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6
Q

Open market operaitons?

A

If the central bank sells government securities, the money supply is contracted

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7
Q

What do open market operations lead to?

A

A reduction in bank deposits due to the level of funds that have been soaked up

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8
Q

If central bank were to buy back securities?

A

Funds would be released into the market

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9
Q

What are reserve asset requirements?

A

The central bank can set a minimum level of liquid assets which banks must maintain

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10
Q

What are special deposits?

A

Reduces the bank’s ability to lend and thereby reducing the money supply

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11
Q

What is direct control for a bank?

A

Central bank may set specific limits on the amount which banks may lend

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12
Q

Issue with increasing interest rates?

A

Less investment
Downward pressure on share prices
Overvalued currency

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13
Q

Issue with monetary policy?

A

Time lag between implementation and effects
Credit control not effective

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14
Q

What is fiscal policy?

A

How governemnts achieve economic objectives through taxation, public spending and the budget deficit or surplus

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15
Q

Benefits of fiscal policy in a recession?

A

Increase government spending to improve demand

Reduce taxation to boost consumption

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16
Q

Issue with inflating economy through fiscal?

A

Significant time lag
A large budget deficit is likely to occur
The rate of inflation is likely to rise

17
Q

Relationship between fiscal and monetary?

A

They are both independent

18
Q

How can fiscal policy reduce demand?

A

Reduce government spending
Increase taxation

19
Q

Supply side policies?

A

The private sector is deemed to be more efficient at providing the output required than the public sector.

20
Q

What do supply side policies include?

A

Low corporate tax rates
Limited government spending
Deregulation of industries

21
Q

What should government spending not exceed in supply side?

A

Government receipts from taxation

22
Q

If private sector is encouraged?

A

Tax rates should be kept to a minimum and government expenditure also should be kept to a minimum

23
Q

Problems with supply side?

A

Time delay before the policies have any impact
The private sector will not provide all the goods and services for society

24
Q

What is an exchange rate policy?

A

The way a government manages its currency in relation to foreign currencies

25
Reasons for controlling exchange rates?
To rectify a balance of trade deficit To prevent a balance of trade surplus To stabilise the exchange rate
26
What is a freely floating exchange rate?
The value of the currency is allowed to move freely with supply and demand market forces
27
Main sources of demand?
Exports of goods and services Inflow of foreign investment Speculative demand
28
Main sources of supply?
Imports of goods and services Outflow of foreign investment Speculative selling
29
What is a fixed exchange rate?
One in which the rate is kept fixed against that of another currency. No fluctuations are permitted
30
What is crawling peg?
Allowed to fluctuate but only within a relatively narrow range around a target rate