Topic 2

Question 1

Define Price stability

Answer 1

This refers to the low and controlled rate of inflation typically around 2%. this is crucial to helping maintain stability in the economy

Question 2

Define Inflation

Answer 2

This is an increase in monetary supply in comparison to the goods in circulation.

Question 3

Define demand pull inflation

Answer 3

This is when the demand for goods and services are greater than the goods and services in circulation therefore driving the prices up

Question 4

Define cost pull inflation

Answer 4

This is when the cost of production has risen for the goods and services due to higher wages/ raw materials. therefore the prices rise.

Question 5

Define Built in inflation

Answer 5

This is when the expectation of future inflation is predicted therefore prices are pushed up and demands for wages are higher.

Question 6

Define disinflation

Answer 6

This is when the rate of inflation slows for examples 3% to 2% which is usually a good sign as it shows that the inflation rate is under control.

Question 7

Define Deflation

Answer 7

This is when the inflation rate has fallen below zero which is not good for the economy as it shows that the economy is contracting or stagnated therefore prices are seen to fall and people are seen to spend less and save more.

Question 8

Define Low employment

Answer 8

This is when everyone who is willing and able to work has a job which means that the economy is expanding as more jobs are being created through land land labor and capital.

Question 8

Define Cyclical unemployment

Answer 8

Cyclical unemployment is in natural cycle in the economy as throughout recessions and booms employment rises and falls .

Question 9

Define Structural unemployment

Answer 9

Structural unemployment is when skills that an individual possess’s is no longer needed in society as the technology has progressed to mitigate the skills possessed leaving the employee no longer in demand.

Question 10

Define frictional unemployment

Answer 10

Frictional unemployment is when an individual is between workforces or freshly entering the workforce leaving them unemployed.

Question 10

What is the relation between unemployment and inflation

Answer 10

The relation between unemployment and inflation is that to reduce unemployment the government will need to apply expansionary policies which cause inflation as they will have to increase government spending and lower interest rates which will cause inflation if the demand increases too quickly.

Question 11

Define the balance of payment equilibrium

Answer 11

This is the accounts of all imports and exports, income from investments and financial transfers therefore it is transactions from the country compared to rest of the world. The equilibrium occurs when the books are all equal.

Question 12

What is the significance of the balance of payments

Answer 12

The significance for the balance of payments is that if a country has more imports than it does exports than this could weaken the currency however if it is the other way around then this would strengthen the currency but could cause inflationary pressures.

Question 13

Define exchange rates

Answer 13

An exchange rate reflects the balance of payments and the strength of the countries currency as if the exchange rate is high then this would mean imports would be cheap but exports would be exposed to competitiveness. if the exchange rate is low then exports would be cheap but could effect inflation due to imports being expensive.

Question 14

Define satisfactory economic growth

Answer 14

Satisfactory economic growth is when the GDP of a country is slow and steadily increasing with increases to life satisfaction.

Question 15

Real vs Nominal Growth

Answer 15

Nominal growth is growth which has not adjusted for inflation whereas real has which offers a much accurate picture.

Question 16

What is the significance of growth in an economy

Answer 16

sustained economic growth is healthy for an economy as it raises standard of living, decreases unemployment and increases gov rev however too much can lead to inflation.

Question 17

What is meant by trade offs in macro economic objectives

Answer 17

The government cant prioritise all of the objectives which can lead to trade offs such as low employment and economic growth usually go hand in hand however this can cause rapid growth leading to inflation

Price stability (low inflation) requires an slow economic growth which can lead to short term unemployment.

Balance of payments often requires slow domestic demand which can reduce growth and increase unemployment.

Example: in an attempt to lower unemployment through expansionary methods ( low interest rates, reducing tax) demand for goods and services rise which will increase inflation.

Question 18

What is recovery and expansion in terms of the economic cycle

Answer 18

This phase normally will follow a recession as economic activity will increase and confidence in the economy will start to increase.

Question 19

What are the 4 indicators for recovery and expansion

Answer 19

The interest rates will be kept low to encourage investment and borrowing.

unemployment will decrease due to increase in demands therefore more workers are needed

the inflation rate will be slow and steady

GDP will be slowly rising as morre goods and services will be produced

Question 20

What is the Boom phase in terms of the economic cycle

Answer 20

This is when there is rapid economic growth and expansion which would typically be the peak of the cycle

Question 21

What are the 4 indicators of a boom

Answer 21

The Bank of England may increase interest rates due to the rapid growth as a measure to stop the economy from overheating

Very low levels of unemployment as businesses need to hire as many workers to meet overwhelming demands

Inflation will be high as the supply will greater than the demand leading to prices being pushed up

High levels of GDP as the economy and businesses flourish leading to increased output

Question 21

what is contraction/ slowing down in terms of the economic cycle

Answer 21

This will typically be a transition point where the boom phase will head towards a recession phase which means the economic growth will slowdown

Question 22

what are the 3 indicators of contraction/slowdown phase

Answer 22

The GDP will slow down as the businesses will lose confidence in the economy

Inflation will decrease as the demand will not be high

Unemployment will begin to rise once again yet again due to lower demands

Question 23

What is the recession phase of the economic cycle

Answer 23

This is when the economic activity will slow down drastically but will not be announced until two consecutive quarters of negative GDP/ Growth has been seen.

Question 24

What are the 4 indicators of a recession

Answer 24

The GDP falls as consumer spending will decrease abd business confidence will also decrease .

The inflation rate will decline even further or may even head towards deflation.

The unemployment rate will rise sharply as the businesses seeing a drastic fall in their production and demand will try to cut costs through lay offs.

The bank of England will make interst rates low as a way to encourage the economy to kick start into a recovery phase by encouraging borrowing and investments.

Question 25

What is monetary policy

Answer 25

The monetary policy is the control of money supply and interest rates in a country. The bank of England controls our monetary policy through the MPC.

Question 25

What is inflation control

Answer 25

Monetary economists will argue that inflation is cause by an increase in money supply as there is more money in the economy prices will rise with the demand. therefore the bank of England will monitor the interest rate closely to manipulate the inflation rates.

when interest rates are high the bank of england are trying to lowers borrowing and dampen the inflation rate where as if interest rates are low they are trying to encourage spending and investmens to increase inflation.

Question 26

What is the bank rate

Answer 26

The bank rate is the borrowing rate which other financial institutions borrow from the bank of England at set through the mpc. If the bank rate increases then the interest rates for all consumers will increase causing savings and less loans. If the bank rate decreases then the cost of borrowing goes down causing more loans and inflation.

Question 27

What is the role of the MPC (Monetary policy committee)

Answer 27

The MPC meets 8 times ina year to discuss and assess the monetary policy which has been set with the goal of steady inflation in mind.

Question 28

What is the impact of changing interest rates for Banks and Lenders

Answer 28

The banks and Lenders (financial intermediaries) take their interest rates from the Bank of England therefore if there is an increase then the banks and lenders will allso increase their rates causing less borrowing and if the interest rates decrease then there will be more borrowing and lending.

Question 29

What is the impact of changing interest rates for Variable-rate loans and Fixed-rate loans

Answer 29

Variable-rate loans: the impact of these changes will hurt the consumer more than the intermediary as they will be directly reflecting the bank rate which will increases and decrease with the banks rate so the burden will fall upon the consumer.

Fixed-rate loans: These loans provide stability to the consumer therefore they will pay the say payment maybe missing out on lower payments but also saving them from higher payments. However these loans will have a penalty fee for paying back the mortgages early to protect the intermediaries.

Question 30

What is Fiscal policy

Answer 30

This policy focuses on taxation and gov spending which influences the economy. This policy will work in tandem with Monetary policy as they would work together to achieve economic objectives such as lowering unemployment and controlling inflation.

Question 31

What is government spending and its effects

Answer 31

Public spending is when a government spends on the essentials in the economy such as healthcare, infrastructure and education for this the gov will take tax from businesses and individuals

Question 32

What are the types of Taxation

Answer 32

There are two types of taxation one being direct tax and indirect tax.

Direct tax is a tax which is taken directly from the individual/ businesses income yearly, capital gains tax or inheritance tax. whereas indirect tax such as VAT is a tax on spending affecting consumer spending.

Question 33

Name and describe the three budget outcomes

Answer 33

Balanced Budget- this is when the taxation received by the gov matches the spending leaving the economy neutral.

Budget Surplus- This is when the taxation recieved is greater than the spending leading to less spending by consumers as demand for goods and services decrease.

Budget Deficit- This is when the Gov spending is greater than the taxation which will leading to demand boosts, however this isn’t great long term as this can increase the national debt.

Question 34

What are the Expansionary Fiscal policy

Answer 34

The sole purpose of expansionary fiscal policies is to boost economic growth and reduce the unemployment rate in a recovery period in the economy, however this can have the side affect of increasing inflation as the demand could overrun the supply.

The gov will achieve this by increasing spending or cutting tax or both.

Question 35

What are the contractionary Fiscal policy

Answer 35

This is used to slow the economy down when it is expanding too fast and over heating and this can be done by increasing the tax or reducing gov spending or both.

however it can increase the unemployment in the economy.

Question 36

what are the micro economic effects of fiscal policy

Answer 36

There are targeted incentives which can used on specific regions or industries to help boost employment or investment.

The tools used are either Grants or Tax incentives. Grants are gifted to businesses/ organisations to incentivise the set up of organisation in a poor economical region and tax incentives are used to increase invest or job creation.

Question 37

what impact does tax and investment have on financial services

Answer 37

The increase in taxation on corporations and income tax will decrease the disposable income and profits used to invest on financial products.

Specific tax regimes may also have an affect on investment as seen in 2016 on the stamp duty land tax which increase the taxes on second properties bought.

Question 38

what is the role of an annual budget in fiscal policy

Answer 38

The annual budget is produced to the house of commons by the chanceller of exchequer.

The budget outlines the spending priorities, the economic performance and the changes in tax.

The forecast is also shown with information from the OCB showing the growth, inflation and borrowing in the future.

Then the future bill will follow showing changes in tax and fiscal policy suggestions

Question 39

What is the purpose of the budget

Answer 39

The purpose of the budget is to outline new policies needed to achive the macroeconomic objectives that the government have such as inflation, growth and balancing the budget. The budget will also control spending which is borrowing and spending.

Question 40

How is tax used to control inflation

Answer 40

The increase in tax will lower the disposable income which individuals and organisations have which will lower demand for products reducing inflation.

Decreasing tax will increase demand for products and increasing disposable income pushing spending but if the increase demand is greater than production inflation may be increased by too much.

Question 41

What was the impact of Brexit on financial service regulations

Answer 41

The financial regulations for the eu and uk remained the same as it was retained but also allowed the uk to adjust and amend certain laws.

The FCA was granted more power to increase the international competitiveness of the uk markets.

Question 42

What is the types of EU law

Answer 42

Regulations:These regulations have direct effects through out all of the member states which remains uniform when applied to an of the states

Derivatives: The derivatives are goals set by the EU to all member states which they all have to achieve but the way at which each member state will achieve these goals will vary.

Question 42

What are some examples of derivatives affecting the financial services

Answer 42

The mortgage credit derivative was places to harmonize the mortgage markets across the eu so that the consumer is protected and builds more competition.

The deposit guarantee scheme derivative ensured that a deposit is guaranteed up to a certain limit which is reviewed every 5 years.

Question 43

what is the European system of financial security

Answer 43

This is system which was set up by the EU to combat the 2007-2009 financial crisis ever happening again as it provides and oversea of the financial markets.

There are key components to this system which are able to overseas their specific sections such as the banking, insurance and the financial markets.

Question 44

What is the European systematic risk board

Answer 44

This system was set up to monitor the financial markets and systems around the eu which will offer advice and issue warnings to members as well as coordinating actions with other international financial bodies.

Question 45

What are the functions of European stem of financial supervision

Answer 45

They have three main functions one of them being creating a singular rulebook. This rulebook for financial services used across member states in which they will have to abide by.

The second function is crisis control. This is the overview of potential threats to the financial market and make decision which all the EU states must follow.

The final function is consumer protection. This function allows all financial services to abide by laws and ruling which will allow any mispractices which take advantage of consumers to be investigated.

Question 46

What was the impact of Brexit in the european supervisory system

Answer 46

Post Brexit the Uk had the FCA and the PRA take over its own financial markets and regulations however if the Uk is to provide services to EU countries then the UK would have to abide by the laws.

Question 47

What are the 4 regulatory oversights in the UK

Answer 47

1. Acts of Parliament- This is the regulation acts that are passed through parliament such as the financial services and markets acts (2000-2023) The UK has also passed some EU laws as a part of their regulations.
2. Regulatory bodies- The PRA is the body which will look over larger institutions and banks ensuring financial stability and the FCA looks over consumers and market integrity

3.Policies and practices of financial institutions- This is the policies that have to be adhered to within the institutions for example the banks will have to adhere to the rules and regulations set by the FCA to protect consumers.

4. Arbitration and consumer protection schemes- This is the service of financial ombudsman which will settle disputes between the consumer and the institution making sure it is fair and just.