Topic 2 The role of government

Question 1

1. What are the two main functions of the government in financial markets?

Answer 1

Managing the economy and regulation.

Question 2

2. What are the main economic objectives of modern government?

Answer 2

The main economic objectives of modern government are:
	price stability;
	low unemployment;
	balance of payments equilibrium;
	economic growth.

Question 3

3. What is fiscal policy? What are three main components?

Answer 3

Fiscal policy is the process by which the government attempts to influence the level of economic activity. It comprises:
 government spending,
 taxation
 borrowing

Question 4

4. The government has decided to discourage imports and encourage exports. What effect would it hope this would have on the country’s balance of payments?

Answer 4

The government would hope to correct a balance of payments deficit by discouraging imports and encouraging exports.

Question 5

5. What is the key component of monetary policy?

Answer 5

Interest rates form the basis of monetary policy.

Question 6

6. What is the MPC inflation target? What happens if the target is missed?

Answer 6

 The target is 2% .
 If inflation +/- 1 % above or below target, the governor must write to the Chancellor to explain why & actions to rectify

Question 7

7. What is the difference between disinflation and deflation?

Answer 7

Disinflation is the term for falling inflation, in which prices rise but at a lower rate. Deflation is the term used when prices actually go down.

Question 8

8. What is the real rate of interest if the nominal interest rate is 4.5% and inflation is 3 % ?

Answer 8

The real rate of return would be (1.045/1.03) – 1 = 1.46%.

Question 9

9. Complete the table by entering the effect on each of the factors in the first column of the pound rising or falling against the currency of a trading partner, and outline why this is the case for each.

Answer 9

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Question 10

10. Briefly describe the five tiers of the UK regulatory system

Answer 10

 First level: European legislation that impacts on the UK financial industry. The two main types of European legislation are regulations and directives.
 Second level: the Acts of Parliament that set out what can and cannot be done.
 Third level: regulatory bodies that monitor the regulations and issue rules to make legislation work in practice. (FCA)
 Fourth level: the policies and practices of the financial institutions themselves.
 Fifth level: the arbitration schemes for consumers’ complaints. (FOS)

Question 11

11. What did the 1979 Cassis de Dijon judgment establish?

Answer 11

The European Court of Justice judgment, Cassis de Dijon, established the principle of mutual recognition by member states of national rules of individual states.

Question 12

12. What are the four main freedoms specified in the Single European Act that came into force in 1987?

Answer 12

The Single European Act specified four main freedoms:
 freedom of movement for persons;
 freedom of movement for goods;
 freedom of movement for capital;
 freedom to provide services in other states.

Question 13

13. What is the key difference between EU regulations and directives?

Answer 13

 EU regulations have general application, are binding in their entirety and directly applicable in all member states (unless particular states have specific dispensation.
 EU directives are binding on each member state within a certain timescale, but it is up to each nation to decide how they are achieved.