topic 2 - economic policy and financial regulation

Question 1

Inflation

Answer 1

• a sustained increase in the general level of prices of goods and services
• Where the rate of growth of the money supply is greater than the rate of growth of real goods and services

Question 2

Disinflation

Answer 2

• a fall in the rate of inflation
• Ie prices are still rising but less quickly than they were

Question 3

Deflation

Answer 3

a general fall in the price of goods and services

Question 4

Macroeconomic objectives

Answer 4

• Price stability – involves a low and controlled rate of inflation. Although this does not mean zero inflation is desirable
• Low unemployment – involves expanding the economy so there is more demand for labour, land and capital
• Balance of payments equilibrium – a situation in which expenditure imports of goods and services and investment income going abroad is equal to the income received from exports of goods and services and the return on overseas investments. The exchange rate of a country’s currency is linked to its balance of payments
• Satisfactory economic growth – the output of the economy is growing in real terms over time and standards of living are getting higher

Question 5

Recession

Answer 5

a significant decline in economic activity of a sustained period

Question 6

Gross domestic product (GDP)

Answer 6

a measure of a country’s overall economic activity

Question 7

Recovery and expansion phase

Answer 7

• Interest rates, inflation and unemployment are low
• Consumers have money to spend
• Demand for goods and services rises, pushing prices up
• Share prices improve

Question 8

Boom phase

Answer 8

To prevent the economy from overheating, the Bank of England may intervene by putting up interest rates to control consumer spending and dampen inflation

Question 9

Contraction or slowdown phase

Answer 9

• 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

Question 10

Recession phase

Answer 10

• 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

Question 11

UK government’s inflation target

Answer 11

Inflation target is 1-3% (2% with a 1% maximum divergence either way)

Question 12

Monetary policy

Answer 12

measures taken to control the supply of money in the economy (eg by raising/lowering interest rates) in order to manage inflation

Question 13

The Monetary Policy Committee (MPC)

Answer 13

• decides on the rate of interest at which the Bank of England will lend to banks and other financial institutions
• is known as the Bank rate
• The Bank acts independently of the government unless during times of extreme economic circumstances

Question 14

Fiscal policy

Answer 14

the adjustment of levels of taxation and public spending in a way that is intended to achieve the governments macroeconomic objectives`

Question 15

Direct taxes

Answer 15

apply to individuals and their assets (income tax, capital gains etc..)

Question 16

Indirect taxes

Answer 16

applied to goods and services at the time they are purchased (eg VAT, stamp duty)

Question 17

Public sector net cash requirement

Answer 17

a government that has a deficit must borrow to finance it. Is a cash measure of the public sectors short-term net financial requirement

Question 18

The Budget

Answer 18

• Each year the Chancellor of the Exchequer makes a Budget statement outlining the state of the economy and the government’s proposal for changes to taxation
• Increased general taxation reduces the amount of money available for investment or to fund loan payments.

Question 19

EU laws - Regulations

Answer 19

• have general application
• Are binding in their entirety
• Directly applicable in all members of states

Question 20

EU laws - Directives

Answer 20

• Are binding upon each state to which they are addressed
• Each member state has discretion as to how they go about achieving the stated aim
• Directive objectives must be achieved within a specific timescale but how they are achieved is left to the authorities within each member state to determine

Question 21

EU Mortgage Credit Directive (MCD)

Answer 21

• aimed to harmonise regulation of the EU mortgage credit market and promote competition

Question 22

European Deposit Guarantee Schemes

Answer 22

• requires that the sterling scheme is revalued every five years to make sure that the level of protection remains in line

Question 23

The European Supervisory Authorities (ESAs) are…

Answer 23

• European Securities and Markets Agency (ESMA)
• European Banking Authority (EBA)
• European Insurance and Occupational Pensions Authority (EIOPA)

Question 24

The aims of the ESAs are…

Answer 24

• creating a single EU rule book
• Issuing guidance and recommendations
• in crisis, providing EU-wide co-ordination and in emergency making decisions
• Mediating in situations where national supervisory authorities disagree
• Conducting reviews to improve consistency of supervision
• Considering consumer protection issues

Question 25

what is meant by a ‘macroeconomic objective’?

Answer 25

An objective that relates to the economy as a whole, rather than a specific sector or individual company

Question 26

What is a potential negative consequence of expanding economic growth to reduce unemployment?

Answer 26

measures taken to expand the economy (eg reducing interest rates & taxation) increase the demand for goods and services – likely to result in inflation

Question 27

All governments aim to achieve zero inflation. True or false?

Answer 27

false – aim to keep prices stable, but seeking to reduce inflation to 0 is likely to increase unemployment

Question 28

What is the UK government’s inflation target and how is it measured?

Answer 28

• 2% - with a maximum divergence of 1% either side
• Measured by the consumer prices index

Question 29

Disinflation means that…

Answer 29

prices are rising but more slowly than previously

Question 30

Which of the following economic measures taken by a government would not help to achieve a budget surplus?

Answer 30

Increasing public spending – to achieve a budget surplus a government must cut public spending, raise taxes or both

Question 31

Which UK body and which EU body are responsible for monitoring the financial system for systemic risk and taking steps to reduce it?

Answer 31

The Bank of England for the UK and the European Systematic Risk Board for the EU