Macro Economics

Question 1

What are the SPA ages?

Answer 1

• Currently 66
• Set to rise to 67 by 2028, and to 68 between 2044 and 2046

Question 2

What does the Pareto Index measure?

Answer 2

The breadth of income and wealth distribution)

Question 3

What is the Lorenz Curve?

Answer 3

• 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.

Question 4

What is the Gini Coefficient?

Answer 4

• It measures the difference between the line of equality and the Lorenz curve
• The larger the number, the higher the inequality

Question 5

What are externalities?

Answer 5

• 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

Question 6

What are merit goods?

Answer 6

• Goods and services that the government or society regards as necessary to avoid underconsumption
• Mostly subsidized by the government e.g. education, libraries

Question 7

What are Kondratieff cycles?

Answer 7

Supercycles of 50 years or more from the benefits of innovation and investment in new technology

Question 8

What is National Income?

Answer 8

the total income of residents of a country, which arises from the production of goods and services produced by that country.

Question 9

What is national income used for?

Answer 9

• measuring the standard of living in a country (national income per head)
• comparing the wealth of different countries

Question 10

What is GDP?

Answer 10

the total value of income/production from economic activity within a country.

Question 11

What is GNP?

Answer 11

GDP + Net Property Income from abroad

Question 12

What is the formula for GDP?

Answer 12

GDP = C + I + G + ( X − M )

Question 13

What is the main measure of inflation in the UK?

Answer 13

CPI

Question 14

What is the difference between RPI and CPI?

Answer 14

• CPI utilises the geometric mean, while the RPI uses the arithmetic mean
• CPI will always yield a lower rate of inflation than the RPI.

Question 15

What happens if CPI is 1% above or below 2%?

Answer 15

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.

Question 16

Examples of Procyclic indicators?

Answer 16

• growth of consumer spending,
• job vacancies
• investment

Question 17

Examples of Countercyclic indicators?

Answer 17

unemployment rate

Question 18

What is Fiscal Policy?

Answer 18

government policy on taxation, public borrowing and public spending

Question 19

What are Expansionary, Contractionary & Neutral Fiscal Policy and the balanced budget multiplier?

Answer 19

• 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

Question 20

What is Monetary Policy?

Answer 20

1) changes in the amount of money in circulation (the money supply)

2) changes in the price of money (interest rates)

Question 21

Who sets interest rates in the UK?

Answer 21

the Monetary Policy Committee (MPC) of the Bank of England (BoE)

Question 22

Who issues sterling?

Answer 22

The BoE is the sole issuer of sterling central bank money

Question 23

What are the BoE’s 2 main objectives?

Answer 23

• 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.

Question 24

What is the Sterling Monetary Framework (SMF)?

Answer 24

allows eligible firms to swap less liquid collateral for central bank reserves

Question 25

What is the difference in terms of timing with regard to fiscal and monetary policy?

Answer 25

Fiscal policy lags are typically longer than monetary policy lags

Question 26

What’s the difference between Narrow and Broad money?

Answer 26

• 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.

Question 27

What’s the difference between M0 and M4?

Answer 27

• 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.

Question 28

What’s the Fisher Equation?

Answer 28

MV = PT

M = the money supply
V = the velocity of circulation
P = the price level
T = the transactions or output

Question 29

What is the current account?

Answer 29

comprises a country’s imports and exports of goods, services and capital and income from investment

Question 29

What is the capital account?

Answer 29

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

Question 30

What is the Financial account?

Answer 30

• 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.

Question 31

How can a current account deficit be corrected?

Answer 31

1) increase overseas borrowing to finance the deficit

2) allow that country’s currency to fall in value against other currencies

Question 32

Which investments are best at each point of the investment cycle?

Answer 32

1. 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).
2. 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.
3. Growth Phase = Assets with the potential for continued earnings growth: Broad exposure to equities, including both domestic and international markets.
4. Growth decelerates due to increase in IR = Defensive assets: Short duration bonds; defensive stocks (eg, utilities, consumer staples, healthcare).
5. End of the bull market = Focus on quality and liquidity: Government bonds and investment grade corporate bonds; defensive stocks; cash.
6. Recession and near market = Safe haven assets: Government bonds (eg, US Treasuries); defensive dividend stocks; gold and precious metals.