The Economic Environment For Business Flashcards
What is Macroeconomics?
Macroeconomic policy is the management of the economy by government in such a way as to influence the performance and behaviour of the economy as a whole.
What are the primary objectives of the macroeconomic policy?
full employment of resources – full and stable employment
price stability – little or no inflation
economic growth – improving living standards
balance of payments equilibrium – ratio of imports to exports
an appropriate distribution of income and wealth – dependent on prevailing political view
What are the risks of conflict in macroeconomics?
Full employment versus price stability
Economic growth versus balance of payments
What is the monetary policy?
Monetary policy is concerned with influencing the overall monetary conditions in the economy.
In particular:
the volume of money in circulation – the money supply
the price of money – interest rates.
What is demand-pull inflation?
excess demand e.g. if interest rates are lowered, people are encouraged to spend rather than save. The increased demand for products and services may not be met quickly with an increased supply and in the meantime prices will rise.
What is cost push inflation?
higher costs e.g. lowering interest rates can lead a decrease in the local exchange rate. This can mean that imports become more expensive, pushing production costs up and leading to suppliers increasing prices to maintain profit.
What is the fiscal policy?
Fiscal policy is the manipulation of the government budget in order to influence the level of aggregate demand and therefore the level of activity in the economy.
Aggregate demand is the total demand for goods and services in the economy
What does the fiscal policy cover?
Government Spending
Taxation
Government Borrowing
What is the role of the government?
balance the budget.
Expenditure by the government is financed either by taxation or borrowing.
A balanced budget is where total expenditure is matched by total taxation income.
A budget deficit is where government expenditure exceeds taxation income. This must be financed by government borrowing.
A surplus budget is where government expenditure is less than taxation income. In this situation the government would be able to pay back some of its borrowing.
competition policy – to prevent economic inefficiency, monopolies disadvantaging consumers and unfair pricing practises (e.g. cartels) and to encourage innovation
provision of government assistance – to encourage economic growth through the use of, e.g. grants and expert advice
green policies – to encourage firms to avoid negative externalities such as pollution
corporate governance guidelines
What is corporate governance?
Corporate governance is defined as ‘the system by which companies are directed and controlled’ and covers issues such as ethics, risk management and stakeholder protection.
Corporate governance frameworks contain regulations on:
separation of the supervisory function and the management function
transparency in the recruitment and remuneration of the board
appointment of non-executive directors (NEDs)
establishment of risk control procedures to monitor strategic, business and operational activities.
