Macro Economics Flashcards
What are the SPA ages?
- Currently 66
- Set to rise to 67 by 2028, and to 68 between 2044 and 2046
What does the Pareto Index measure?
The breadth of income and wealth distribution)
What is the Lorenz Curve?
- It plots the % income cumulative against the income distribution of households (from poorest to richest).
- A straight-line relationship shows there is perfect equality in an economy.
- However, in all economies, there is inequality and the resultant Lorenz curve produced is concave.
What is the Gini Coefficient?
- It measures the difference between the line of equality and the Lorenz curve
- The larger the number, the higher the inequality
What are externalities?
- activities that arise from the production and/or consumption of goods and services that affect other parties (either an individual, single entity, or society as a whole), but for which no appropriate compensation is paid (ie, spillover).
- e.g. education leads to higher GDP, pollution
What are merit goods?
- Goods and services that the government or society regards as necessary to avoid underconsumption
- Mostly subsidized by the government e.g. education, libraries
What are Kondratieff cycles?
Supercycles of 50 years or more from the benefits of innovation and investment in new technology
What is National Income?
the total income of residents of a country, which arises from the production of goods and services produced by that country.
What is national income used for?
- measuring the standard of living in a country (national income per head)
- comparing the wealth of different countries
What is GDP?
the total value of income/production from economic activity within a country.
What is GNP?
GDP + Net Property Income from abroad
What is the formula for GDP?
GDP = C + I + G + ( X − M )
What is the main measure of inflation in the UK?
CPI
What is the difference between RPI and CPI?
- CPI utilises the geometric mean, while the RPI uses the arithmetic mean
- CPI will always yield a lower rate of inflation than the RPI.
What happens if CPI is 1% above or below 2%?
the Governor of the BoE must write an open letter to the Chancellor explaining the reasons why, and what the BoE proposes to do to ensure that inflation comes back to target.
Examples of Procyclic indicators?
- growth of consumer spending,
- job vacancies
- investment
Examples of Countercyclic indicators?
unemployment rate
What is Fiscal Policy?
government policy on taxation, public borrowing and public spending
What are Expansionary, Contractionary & Neutral Fiscal Policy and the balanced budget multiplier?
- Expansionary – spending more money and financing this expenditure by borrowing, or collecting less in taxes. Spending will increase and so national income will tend to rise, either in real terms, or in terms of price levels only
- Contractionary – collecting more in taxes without increasing spending. A government may deliberately raise taxation to take inflationary pressures out of the economy.
- Neutral – collecting more in taxes in order to increase spending, thus diverting income from one part of the economy to another.
- Balance budget multiplier - raises taxes and spending by the same amount
What is Monetary Policy?
1) changes in the amount of money in circulation (the money supply)
2) changes in the price of money (interest rates)
Who sets interest rates in the UK?
the Monetary Policy Committee (MPC) of the Bank of England (BoE)
Who issues sterling?
The BoE is the sole issuer of sterling central bank money
What are the BoE’s 2 main objectives?
- Implement monetary policy by maintaining overnight market interest rates in line with the BoE’s bank rate (also called the base rate)
- Reduce the cost of disruption to the liquidity and payment services supplied by commercial banks.
What is the Sterling Monetary Framework (SMF)?
allows eligible firms to swap less liquid collateral for central bank reserves
What is the difference in terms of timing with regard to fiscal and monetary policy?
Fiscal policy lags are typically longer than monetary policy lags
What’s the difference between Narrow and Broad money?
- Narrow money describes the total sum of all financial assets (including cash) which meet a somewhat narrow definition of money; for example, they must be very liquid and available to finance current spending needs.
- Broad money describes the total sum of a wider range of assets, including some which are not as liquid as those falling within the definition of narrow money. It may include, for example, money held in savings accounts which are not instant access accounts.
What’s the difference between M0 and M4?
- M0 is the narrowest definition of money, measuring notes and coins in circulation outside the BoE, plus operational deposits at the BoE.
- M4 is the broadest definition, measuring of notes and coins in circulation with the public, plus sterling deposits held with UK banks and building societies by the rest of the private sector.
What’s the Fisher Equation?
MV = PT
M = the money supply
V = the velocity of circulation
P = the price level
T = the transactions or output
What is the current account?
comprises a country’s imports and exports of goods, services and capital and income from investment
What is the capital account?
this comprises financial transactions that do not affect income, production or savings (eg, a copyright)
It records changes in ownership of assets, including foreign investments, loans, and the transfer of financial assets
What is the Financial account?
- This comprises transactions for increases or decreases in international ownership of assets.
- This account has four components: foreign direct investment (or FDI), portfolio investment, other investment, and reserve account flows.
How can a current account deficit be corrected?
1) increase overseas borrowing to finance the deficit
2) allow that country’s currency to fall in value against other currencies
Which investments are best at each point of the investment cycle?
- Start of a bull market = Cyclical and growth assets and momentum sectors: High duration bonds; interest rate-sensitive equities (eg, banks, technology and ‘growth’ stocks).
- Groth accelerates as IR fall = Geographies, assets and sectors that are sensitive to economic cycles: High-yield bonds; cyclical stocks (eg, industrials, materials); emerging market equities.
- Growth Phase = Assets with the potential for continued earnings growth: Broad exposure to equities, including both domestic and international markets.
- Growth decelerates due to increase in IR = Defensive assets: Short duration bonds; defensive stocks (eg, utilities, consumer staples, healthcare).
- End of the bull market = Focus on quality and liquidity: Government bonds and investment grade corporate bonds; defensive stocks; cash.
- Recession and near market = Safe haven assets: Government bonds (eg, US Treasuries); defensive dividend stocks; gold and precious metals.
