Topic 2 Flashcards

1
Q

Macroeconomic

A

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.

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2
Q

Microeconomic

A

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.

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3
Q

Inflation

A

The rise in prices of goods and services over time.

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4
Q

Disinflation

A

Prices rise over a period, but at a lower rate than before.

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5
Q

Deflation

A

Prices fall over a period of time.

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6
Q

Gross domestic product (GDP)

A

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.

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7
Q

Recession

A

A country’s gross domestic product (GDP) falls in two consecutive quarters.

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8
Q

Money supply

A

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.

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9
Q

Monetary policy

A

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.

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10
Q

Fiscal policy

A

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.

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11
Q

A recession is defined as:

A

two quarters of negative GDP growth.

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12
Q

Which of the following is not a European Supervisory Authority (ESA)?

A

European Systemic Risk Board

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13
Q

The government takes more in taxation than it spends on public services. This is most likely to result in the economy:

A

contracting.

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14
Q

Which of the following is an example of an indirect tax?

A

Fuel duty.

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15
Q

Which of the following best describes EU Directives?

A

describe the required outcome but leave member states to decide how they are achieved.

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16
Q

In normal circumstances, what is the maximum number of times the Bank of England base rate could change in a 12-month period?

A

8

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17
Q

Which of the following is not a government macroeconomic objective?

A

Maximum employment levels.

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18
Q

During the recovery and expansion phase of the economic cycle, share prices are most likely to:

A

increase.

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19
Q

Allowing for the maximum permitted divergence, the Monetary Policy Committee inflation target is:

A

1-3 %

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20
Q

The increase in the Consumer Prices Index has fallen from 4% to 2.5% in the past 12 months. This is an example of:

A

disinflation

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21
Q

KEY MACROECONOMIC OBJECTIVES

A
  1. Price stability
  2. Low unemployment
  3. 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.
  4. Satisfactory economic growth – the output of the economy is growing in
    real terms over time and standards of living are getting higher
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22
Q

The four objectives given above tend to fall into two pairs:

A

–policies to reduce unemployment will also boost growth;
„ measures to reduce inflation will also help to improve the balance of
payments

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23
Q

Over time, economies typically go through four main phases

A

–recovery and expansion;
„ boom;
„ contraction or slowdown; and
„ recession

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24
Q

Economic activity is measured by the fall and rise in

25
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.
26
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
27
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
28
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
29
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
30
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
31
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.
32
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
33
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
34
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
35
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
36
DIRECT TAXES
Apply to individuals and their assets (income tax, capital gains tax, inheritance tax, National Insurance)
37
INDIRECT TAXES
Applied to goods and services at the time they are purchased (eg VAT, stamp duty).
38
FISCAL POLICY
The adjustment of levels of taxation and public spending in a way that is intended to achieve the government’s macroeconomic objectives.
39
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.
40
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
41
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
42
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
43
he European System of Financial Supervision (ESFS
its aim is to ensure consistent financial supervision across the member states
44
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)
45
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
46
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).
47
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
48
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
49
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.
50
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
51
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
52
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
53
Disinflation means that:
Prices are rising but more slowly than previously
54
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
55
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
56
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.
57
Fiscal
Taxation
58
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
59
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