Financial Management Environment (3) Flashcards
Normal way of measuring inflation?
Through CPI
Key objective of inflation?
To keep it low
What is demand-pull inflation?
Inflation arises due to demand exceeding the maximum output of the economy with full employment
What is cost-push inflation?
Increases in the unit costs of production, leading to higher costs
Economic consequences of inflation?
A fall in the exchange rate
A need for higher nominal interest rates
Purchasing power of investments may be reduced
Inflation effect for businesses (entre)
Entrepreneurial activity is reduced
Inflation effect for businesses (international)
International competitiveness suffers where prices rise faster than those of foreign competitors
Inflation effect for businesses (interest rates)
Higher interest rates reduce the number of profitable investment opportunities
Inflation effect for businesses (ROCE)
Is overstated as profits are overstated and capital employed is understated
Inflation effect for businesses (historic costs)
Understates the value of assets
Mitigate effects of inflation (purchasing power)
Use of current purchasing power or current cost accounting
Reasons for government intervention in free market?
An industry is of key national strategic importance
The free market creates social injustice
What is sustainability?
Meeting the needs of the present without compromising the ability of future generations to meet their own needs.
Benefits of the eurozone?
Euro allows easy comparison of prices between member countries, leading to increased competition.
There is also a move towards tax harmonisation
Financial intermediaries examples?
Building societies
Commercial banks
Insurance companies
Aggregation?
Small deposits are combined and lent to large borrowers
Maturity transformation?
A continuing stream of short-term deposits can be used to lend monies in the long term
Risk diversification?
The risk of each particular borrower is effectively spread across many lenders
Liquidity?
Providing a liquid market with flexibility and choice for both lenders and borrowers
Hedging?
Providing instruments to business for hedging risk
Commercial clearing banks?
Issue certificates of deposits
Provide a money transmission service through the clearing system
What is bank lending?
Overdraft facilities and term loans
The purchase of short-term government securities
The purchase of trade or commercial bills
