Financial Management Environment (2) Flashcards
Why are macroeconomic policies adopted?
To achieve full employment, acceptable distribution of wealth, enhance growth
(Anything whole society)
What is monetary policy?
How governments achieve economic objectives using moentary instruments
What is a financial instrument?
A contract for a monetary asset
Monetary policy actions?
Reduce demand of money through interest rates
Effect of increase in interest rate?
Increases the cost of borrowing
Open market operaitons?
If the central bank sells government securities, the money supply is contracted
What do open market operations lead to?
A reduction in bank deposits due to the level of funds that have been soaked up
If central bank were to buy back securities?
Funds would be released into the market
What are reserve asset requirements?
The central bank can set a minimum level of liquid assets which banks must maintain
What are special deposits?
Reduces the bank’s ability to lend and thereby reducing the money supply
What is direct control for a bank?
Central bank may set specific limits on the amount which banks may lend
Issue with increasing interest rates?
Less investment
Downward pressure on share prices
Overvalued currency
Issue with monetary policy?
Time lag between implementation and effects
Credit control not effective
What is fiscal policy?
How governemnts achieve economic objectives through taxation, public spending and the budget deficit or surplus
Benefits of fiscal policy in a recession?
Increase government spending to improve demand
Reduce taxation to boost consumption
Issue with inflating economy through fiscal?
Significant time lag
A large budget deficit is likely to occur
The rate of inflation is likely to rise
Relationship between fiscal and monetary?
They are both independent
How can fiscal policy reduce demand?
Reduce government spending
Increase taxation
Supply side policies?
The private sector is deemed to be more efficient at providing the output required than the public sector.
What do supply side policies include?
Low corporate tax rates
Limited government spending
Deregulation of industries
What should government spending not exceed in supply side?
Government receipts from taxation
If private sector is encouraged?
Tax rates should be kept to a minimum and government expenditure also should be kept to a minimum
Problems with supply side?
Time delay before the policies have any impact
The private sector will not provide all the goods and services for society
What is an exchange rate policy?
The way a government manages its currency in relation to foreign currencies
Reasons for controlling exchange rates?
To rectify a balance of trade deficit
To prevent a balance of trade surplus
To stabilise the exchange rate
What is a freely floating exchange rate?
The value of the currency is allowed to move freely with supply and demand market forces
Main sources of demand?
Exports of goods and services
Inflow of foreign investment
Speculative demand
Main sources of supply?
Imports of goods and services
Outflow of foreign investment
Speculative selling
What is a fixed exchange rate?
One in which the rate is kept fixed against that of another currency. No fluctuations are permitted
What is crawling peg?
Allowed to fluctuate but only within a relatively narrow range around a target rate
