Macro economics

Question 1

Name the 7 types of risk to investments.

Answer 1

1. Inflation risk
2. Interest rate risk
3. Credit risk
4. Currency risk
5. Liquidity risk
6. Operational risk
7. Reinvestment risk

Question 2

What effect can high interest rates have on a country’s currency?

Answer 2

High interest rates results in higher demand for deposits in that country, therefore strengthens the currency of that country against other currencies.

Question 3

How does inflation impact on Fixed Interest investments?

Answer 3

In times of high inflation, the fixed return represents poorer value & the prices of Bonds fall as demand reduces. This does result in Bond yields increasing.

Question 4

What are the 5 main functions of the Bank of England?

Answer 4

1. Control of interest rates
2. The lender of last resort
3. Control the money supply
4. Banker to the Government
5. Regulator (the Prudence Regulation Authority)

Question 5

Why might the BofE want to keep interest rates low?

Answer 5

Fuels demand (gives people more money to spend).

More spending=More money into companies for growth.

Encourages businesses to borrow more.

Keeps business costs down and therefore increasing profits & corporation tax.

Stimulates the housing market.

Encourages consumers & businesses to take risks.

Keeps down the cost of borrowing for the government.

Prevents gilt prices from falling too low.

Question 6

What are the four stages of the economic cycle?

Answer 6

1. Boom
2. Slowdown
3. Recession
4. Recovery