Module 17

Question 1

UK government’s economic strategy (eg economic growth, reducing unemployment, improving productivity) is formally stated in

Answer 1

The annual budget

Question 2

Scottish government can

Answer 2

• Control how it spends allocated funding on areas under its’ control eg education/ health
• Vary income tax rate

Question 3

Price stability is measured using

Answer 3

Consumer price index (CPI) - statistical estimate constructed using sample of representative items whose prices are collected periodically. Target is currently 2%

Question 4

When prices are stable

Answer 4

The value of money is being maintained

Question 5

If the value of money is falling and uncertain

Answer 5

Inflation is present - can fundamentally interfere with the functioning of a market economy > price changes are harder to interpret

Question 6

Economic problems created by price instability (3)

Answer 6

• Industrial relations conflict
• Redistribution of income and wealth (loss of purchasing power)
• International competitiveness

Question 7

Types of economic policy (2)

Answer 7

• Fiscal policy

- Monetary policy

Question 8

Monetary policy

Answer 8

Concerned with the supply of money and terms + availability of credit

Question 9

Monetary policy aim

Answer 9

To achieve price stability by influencing the level of demand in the economy so it grows in line with economy’s ability to produce goods and services

Question 10

Increase in interest rates impact

Answer 10

• Cost of existing floating rate loans will increase
• Interest rate return on deposits is higher, therefore expected return on investments will increase, investment will fall
• If a bus sells goods which usually require financing, becomes more expensive for the consumer - demand for goods may fall.

Used to slow down the demand for goods and services and control inflation

Question 11

Decrease in interest rates impact (2)

Answer 11

• Cost of borrowing will reduce, making loans and credit cards less expensive. Encourages people to spend more.
• Magnification as asset prices rise giving consumers greater feeling of wealth and ability to spend

Used to stimulate the demand for goods and services

Question 12

Who has power to change interest rate?

Answer 12

Bank of England

Question 13

Main instrument for control of interest rates

Answer 13

Bank rate = rate the BoE will lend to other banks

Question 14

Bank rate controlled by

Answer 14

Monetary Policy Committee (MPC) > 9 members (Governor, 3 deputy governors, Chief Economist and four experts appointed by the Chancellor). Minutes are publicised and closely analysed.

Question 15

Bank of England functions

Answer 15

• Government’s banker (arranged borrowing and repayment of gov debt)
• Maintaining financial stability - quantitative easing/ lender of last resort (HBOS)
• Maintaining foreign currency reserves - used to trade on forex markets to stabilise exchange rate
• International regulation of the banking sector > Bank for International Settlements set eg min capital requirements for commercial banks

Question 16

Fiscal policy

Answer 16

Government’s policy on spending and taxation

Question 17

If government’s overall spending exceeds tax revenues

Answer 17

Referred to as budget/ fiscal deficit

Question 18

Running large deficit over number of years can lead to (3)

Answer 18

• High national debt
• Higher risk associated with government bonds
• Higher interest rates

Question 19

Improving productivity (6)

Answer 19

• Creating world class digital infrastructure (4G/ free wifi)
• Improving digital skills (eg coding)
• Encouraging enterprise and innovation (apprenticeships)
• Creating right conditions for investment (corporation tax reduced)
• Reducing administration and compliance costs
• Promoting competition (Competition Act 1998)

Question 20

Kyoto Protocol (5)

Answer 20

• Legally binding Feb 2005
• 37 nations committed to make 5.2% gas emission cuts
• US refused
• Amended - now runs to 31/12/20
• Parties must reduce emissions by 18% from 1990 levels

Question 21

UK government measures to meet Kyoto target (3)

Answer 21

• Climate change levy (tax on energy use by businesses)
• Landfill tax (tax on disposal of waste)
• Emissions trading (tradeable permits)

Question 22

UK gov policy on exchange rates

Answer 22

Allowed to be determined mainly by market forces, therefore the value of the £ has been volatile

Question 23

Exchange rate determined by

Answer 23

Forces of supply and demand

Question 24

Factors that will increase exchange rate (4)

Answer 24

• Higher interest rates
• Higher economic growth
• Expectations of future increase
• Lower inflation - increasing competitiveness of exports

Question 25

Regulation

Answer 25

Government seeks to control business activities when it deems this to be in the public interest

Question 26

Competition and Markets authority

Answer 26

• Formed 2014
• Mission = to make markets work well for consumers
• Pursues mission by:
  1) Enforcement of competition law
  2) Enforcement of consumer protection legislation

Question 27

Enforcement of competition law (5)

Answer 27

• Competition Act 1998
• Prohibits anti-competitive agreements eg price fixing/ production limits , irregular contracting/ trading
• If <25% market share, unlikely to be impact on competition
• CMA can order termination of agreement or impose penalty
• Abuse of dominant position (>40%) eg charging excessive prices, limiting production, refusing to supply customers

Question 28

Enforcement of consumer protection legislation (5)

Answer 28

• CMA promotes compliance with and understanding of the law
• Monitors markets for goods and services to identify potential problem traders
• CMA can start own investigations or respond to request from MPs
• Can ask for written assurances from traders and take to court if broken
• Can propose changes in law to the government

Question 29

Problem trader =

Answer 29

Neglected responsibilities under civil or criminal law to detriment of consumers

Question 30

Regulators of private industries

Answer 30

Gov created regulatory body for each of industry sectors privatised in 1980s/90s eg water/ rail

Question 31

Impact of EU membership (4)

Answer 31

• Competition (mergers/ Treaty of Rome)
• Labour rights (Maastricht Treaty 48 hour working week)
• Taxation (min tax rates in place for VAT)
• Grants (eg Common Agricultural Policy - CAP)

Question 32

Eurozone monetary policy set by

Answer 32

ECB