Topic 2 Flashcards
Macroeconomic
The ‘big picture’, looking at the economy as a whole and setting objectives to effect the whole economy, such as taxation, inflation, national employment, etc.
Microeconomic
Looking at effecting local economies or specific industries by targeted action, such as tax incentives to attract companies to specific regions, or actions to boost certain types of companies.
Inflation
The rise in prices of goods and services over time.
Disinflation
Prices rise over a period, but at a lower rate than before.
Deflation
Prices fall over a period of time.
Gross domestic product (GDP)
A measure of a country’s economic activity, used to show the size and health of the economy. It is calculated as the total market value of all goods and services produced by that country during a specific period.
Recession
A country’s gross domestic product (GDP) falls in two consecutive quarters.
Money supply
A measure of the total amount of money in the economy at a specific time – it includes notes, coins, bank operational balances at the Bank of England and private sector deposit accounts.
Monetary policy
Controlling the supply of money in a country to manage inflation, mainly through interest rates. Less money in the economy will restrict spending to reduce inflation. Increasing the amount of money available will increase spending and inflation.
Fiscal policy
The use of taxation and government borrowing and spending to affect economic activity, and can also influence the money supply, although monetary policy is the main tool for money supply.
A recession is defined as:
two quarters of negative GDP growth.
Which of the following is not a European Supervisory Authority (ESA)?
European Systemic Risk Board
The government takes more in taxation than it spends on public services. This is most likely to result in the economy:
contracting.
Which of the following is an example of an indirect tax?
Fuel duty.
Which of the following best describes EU Directives?
describe the required outcome but leave member states to decide how they are achieved.
In normal circumstances, what is the maximum number of times the Bank of England base rate could change in a 12-month period?
8
Which of the following is not a government macroeconomic objective?
Maximum employment levels.
During the recovery and expansion phase of the economic cycle, share prices are most likely to:
increase.
Allowing for the maximum permitted divergence, the Monetary Policy Committee inflation target is:
1-3 %
The increase in the Consumer Prices Index has fallen from 4% to 2.5% in the past 12 months. This is an example of:
disinflation
KEY MACROECONOMIC OBJECTIVES
- Price stability
- Low unemployment
- Balance of payments equilibrium – a situation in which expenditure on
imports of goods and services and investment income going abroad is
equal to (ie in equilibrium with) the income received from exports of goods
and services and the return on overseas investments. The exchange rate
of the country’s currency is linked to the balance of payments, and most
governments aim to keep the price of currency stable at a level that is
not so high that exports will be discouraged but not so low as to increase
inflation. - Satisfactory economic growth – the output of the economy is growing in
real terms over time and standards of living are getting higher
The four objectives given above tend to fall into two pairs:
–policies to reduce unemployment will also boost growth;
measures to reduce inflation will also help to improve the balance of
payments
Over time, economies typically go through four main phases
–recovery and expansion;
boom;
contraction or slowdown; and
recession
Economic activity is measured by the fall and rise in
in GDP
Recovery and
expansion
Interest rates, inflation and unemployment are low.
Consumers have money to spend. Demand for goods
and services rises, pushing prices up. Share prices
improve as businesses flourish.
Boom
To prevent the economy from overheating, the Bank of
England may intervene by putting up interest rates to
control consumer spending and dampen inflation
Contraction or
slowdown
Once the interest rate rises start to bite, consumer
spending falls. Demand for goods and services falls,
profits fall (as do share prices) and unemployment
rises. Inflation slows down
Recession
As the economy heads towards its lowest level of
activity, the Bank of England may intervene to reduce
interest rates in a bid to stimulate demand and set the
economy on the path back to recovery
CONSUMER PRICES INDEX (CPI)
A measure of the change in price of
a ‘basket’ of consumer goods and
services over a period. Items to be
included in the ‘basket’ are reviewed
regularly to ensure it provides an
accurate reflection of consumer
spending. It is the equivalent of the
Harmonised Index of Consumer Prices
(HICP) used within the eurozone
Bank rate or or referred to as ‘base rate’
The Monetary
Policy Committee (MPC) of the Bank of England decides on the rate of interest
at which the Bank of England will lend to banks and other financial institutions,
and it is this official rate (known as Bank rate) that determines all the other
interest rates charged to borrowers and paid to lenders
The Treasury
The Treasury retains the right to give instructions to the Bank of England
regarding its monetary policy in “extreme economic circumstances”; otherwise
the Bank acts independently of the government.
INFLATION TARGET
The level of inflation that economists judge is appropriate to keep the
national economy functioning efficiently.
2% with a 1 per cent maximum
divergence either way
THE MPC AND INTEREST RATES
Interest rates are set by the Bank of England’s Monetary Policy
Committee (MPC).The MPC usually meets eight times a year
over three days to set the interest rate that it judges will enable
the inflation target to be met
Good to know
There is normally a penalty for paying off the mortgage within the fixed-rate
period, too, in order to protect the lender
Fiscal policy
Fiscal policy (which is sometimes called budgetary policy) involves influencing
the money supply and the overall level of economic activity, including
consumption and investment, by manipulating the finances of the public sector
(which comprises central government, local authorities and public corporations
DIRECT TAXES
Apply to individuals and their assets (income tax, capital gains tax,
inheritance tax, National Insurance)
INDIRECT TAXES
Applied to goods and services at the time they are purchased (eg VAT,
stamp duty).
FISCAL POLICY
The adjustment of levels of taxation and public spending in a way that is
intended to achieve the government’s macroeconomic objectives.
PUBLIC SECTOR NET CASH REQUIREMENT
A government that has a deficit must borrow to finance it. The public
sector net cash requirement (PSNCR) is a cash measure of the public
sector’s short-term net financing requirement.
EU Regulations
Have general application.
Are binding in their entirety, both in respect of what is to
be achieved and how it is to be achieved.
Are directly applicable in all member states (unless
particular states have specific dispensation
EU Directives
Are binding upon each member state to which they are
addressed as to the result to be achieved.
Each member state has discretion as to how they go about
achieving the stated aim of the directive.
The directive objectives must be achieved within a specific
timescale (typically two years) but exactly how they are
achieved is left to the authorities within each member state
to determine
An example of an EU directive
U Mortgage Credit
Directive (MCD), which the UK has retained post-Brexit through
the Mortgage Credit (Amendment) (EU Exit) Regulations 2019.The MCD aimed to harmonise regulation of the EU mortgage
credit market and promote competition.An example of an EU regulation that has implications for the
financial services industry is the General Data Protection
Regulation (GDPR).Another example of how EU directives affect the financial
services sector is the changes to the deposit protection limits
in the UK
he European
System of Financial Supervision (ESFS
its aim is to ensure consistent financial
supervision across the member states
ESFS
he ESFS is decentralised, operating via three
supervisory authorities and a network of national regulators. The European
Supervisory Authorities (ESAs) are the:
European Securities and Markets Agency (ESMA);
European Banking Authority (EBA); and
European Insurance and Occupational Pensions Authority (EIOPA)
ESA (European Supervisory authority)
The ESAs have significant powers to propose new rules and make decisions
that are binding upon national supervisors, such as the FCA, and firms. The
aims of the ESAs include
European Systemic Risk Boar
Its role is to
prevent and mitigate systemic financial risk across the EU. Its responsibilities
include:
identifying and prioritising risks;
issuing warnings and recommendations and monitoring their follow-up;
co-operating with other members of the ESFS; and
co-ordinating action with other international financial organisations, such
as the International Monetary Fund (IMF).
The Single Supervisory Mechanism
The Single Supervisory Mechanism (SSM) is the name for the mechanism by
which the European Central Bank holds responsibility for the supervision and
monitoring of banks in EU member states
The European Union has issued a new regulation. This means
that each member state
Each member state is bound by the regulation in its
entirety regardless of existing legislation
Post-Brexit, which of the following is correct when the EU
changes a regulation or introduces new regulation?
The UK is not legally required to adopt or ignore a
new or reformed piece of EU regulation but has the freedom to consider
whether it adopts the regulation or develops its own approach.
THE FIVE TIERS OF REGULATORY OVERSIGHT IN THE UK
First Level
Onshored EU legislation at the time of Brexit and other EU legislation
(regulations and directives that impact on the UK financial services
industry)
Second Level
Acts of Parliament (eg Financial Services and Markets Act 2000)Third Level
Regulatory bodies (monitoring regulations and
issuing rules and requirements)Fourth Level
Policies/practices of the financial institution
(the bank’s own proceduresFifth Level
Arbitration schemes (eg Financial
Ombudsman Scheme
All governments aim to achieve zero inflation. True or false?
False. They aim to keep prices stable, but seeking to reduce inflation to
zero is likely to increase unemployment
What is the UK government’s inflation target and how is it measured?
The UK government’s inflation target is 2 per cent with a maximum divergence
either side of 1 per cent. It is measured by the Consumer Prices Index
Disinflation means that:
Prices are rising but more slowly than previously
Which of the following economic measures taken by a
government would not help to achieve a budget surplus?
Increasing public spending. To achieve a budget surplus a government
must cut public spending, raise taxes, or both
A new piece of EU legislation is being introduced. It is being
implemented at the same time and in exactly the same way
across all member states. This indicates that the legislation is
in the form of:
A regulation. Member states have flexibility in the way they introduce directives
Which UK body and which EU body are responsible for
monitoring the financial system for systemic risk and taking
steps to reduce it
The Bank of England for the UK and the European Systemic Risk Board
(ESRB) for the EU.
Fiscal
Taxation
What are the aims of the European supervisory authorities (ESA’s) ?
creating a single EU rule book
-issuing guidance and recommendations
-investigating national supervisory authorities that are failing to comply
-in a crisis providing EU wide co ordination
-mediating in certain situations where national supervisory authorities disagree
-considering consumer protection issues
What is the role of the European systemic risk board (ERSB) ?
-identify and prioritising risks
-issuing warnings and recommendations and monitoring their follow up
-co operating with other members of the ESFS
-co ordinating action with other international financial organisations
