Investments Topic 1 - The Economic Environment

Question 1

The Office for National Statistics (ONS) produces population bulletins that contain research on the following:

Answer 1

• Population projections for the future
• Factors affecting population changes, including migration
• Population demographics, including median population age
• The ‘dependency ratio’, which is the ratio of working age people to pension aged people

Question 2

Most population surveys show that many countries have an ageing population, including:

Answer 2

• UK
• Japan
• Spain
• France
• Italy

Question 3

Some social factors that affect both the economy and financial markets are

Answer 3

• Increasing living standards and expectation of the population
• There has been a shift from manufacturing sectors to more ‘service-based sectors, resulting in cheaper imports on the back of a reducing industrial sector. This is good for the balance of payments
• Markets nervous of ‘social engineering’ – some governments trying to redistribute wealth through taxation and benefits
• Employment and productivity is essential, as if there is high unemployment then workers will save more due to unknown circumstances, and more public spending needed to provide benefits

Question 4

What is cycle theory and what is the typical timeframe associated with it

Answer 4

Cycle theory explains that investors can predict when there is going to be a peak and trough of share prices (typically over a defined time of 39 and 78 weeks) and this means investors can buy and sell at the right time.

Question 5

What is Stagflation

Answer 5

combines stagnation and inflation, for when a prolonged period of time not much movement in the economy takes place, usually accompanied by high unemployment and increasing prices – this is not very common because demand for goods reduce in a recession, so prices don’t rise

Question 6

What is the difference between RPI and RPIX

Answer 6

RPIX is * Calculated as the ‘RPI minus the mortgage repayments’

Question 7

What is the calcualtion for figuring out the percentage change for an index

Answer 7

Question 8

Influences on general interest rates

Answer 8

• Fiscal policy
• Higher levels of individual borrowing
• Monetary policy
• Condition of domestic economy
• Foreign interest rates
• World economic conditions for goods and services
• Commodity prices

Question 9

What is hte common relationship between interest rates and equities

Answer 9

Interest rates and equities also have a common relationship, where higher interest rates are bad for equities and low interest rates are good.

Question 10

What factors can affect exchange rates

Answer 10

• Inflation – high inflation leads to fall in exchange rate
• Interest rates – rise in rates typically increases exchange rate, except when inflation is too high
• Income growth and economic growth
• Balance of payments – if country imports a lot but does not match with exports, the currency will decline
• Government – gov. intervention can be used if the currency is too strong, as this may prevent any exports from taking place
• Confidence – confidence in a country and their economy can affect their currency price

Question 11

Gross domestic product (GDP) is the total amount of

Answer 11

income from the UK economy

Question 12

Fiscal policy comprises of

Answer 12

government spending, taxation and borrowing

Question 13

The effect of a fiscal poliyc can be measured through a

Answer 13

Budget surplus/deficit