U1: T2 - ECONOMICS POLICY AND FINANCIAL REGULATION

Question 1

What is meant by a ‘macroeconomic objective’?

Answer 1

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

Question 2

The European Union has issued a new regulation. This means
that each member state:

a) has the choice whether or not to adopt the regulation.

b) must pass legislation to implement the regulation within two years.

c) is bound by the regulation in its entirety regardless of existing legislation.

d) has the choice of how to adopt the regulation’s objectives

Answer 2

Answer c) is correct. Each member state is bound by the regulation in its entirety regardless of existing legislation. Answers a), b) and d) relate to directives.

Question 3

Post-Brexit, which of the following is correct when the EU changes a regulation or introduces new regulation?

a) The UK is legally required to adopt or implement the new
or reformed EU regulation.

b) The UK is legally required to ignore the new or reformed EU regulation entirely.

c) The UK should consider whether it adopts a new regulation or develops its own alternative approach; and, in the case of reformed EU regulation, whether it wishes to amend the legislation it onshored before Brexit.

Answer 3

Answer c) is correct. 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.

Question 4

What are the four key macroeconomic objectives that UK governments generally seek to achieve?

Answer 4

Price stability, low unemployment, a balance of payments equilibrium and satisfactory economic growth.

Question 5

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

Answer 5

Measures taken to expand the economy (eg reducing interest rates and taxation) increase the demand for goods and services, which is likely to result in a rise in inflation

Question 6

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

Answer 6

False. They aim to keep prices stable, but seeking to reduce inflation to zero is likely to increase unemployment.

Question 7

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

Answer 7

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.

Question 8

Disinflation means that:
a) prices are rising faster than previously.
b) prices are falling.
c) prices are rising but more slowly than previously.
d) prices are staying the same

Answer 8

c) Prices are rising but more slowly than previously.

Question 9

In June, the Monetary Policy Committee (MPC) decides to raise the Bank rate by half a percentage point. In August, Paul and Amanda’s mortgage payments increase. Explain how these two events are likely to be linked.

Answer 9

Paul and Amanda must have a variable‐rate mortgage, so the amount they pay each month is likely to rise and fall broadly in line with changes in the Bank rate.

Question 10

Which of the following economic measures taken by a government would not help to achieve a budget surplus?
a) Increasing taxation.
b) Increasing public spending.
c) Reducing public spending.

Answer 10

b) Increasing public spending. To achieve a budget surplus a government must cut public spending, raise taxes, or both.

Question 11

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) a directive.
b) a regulation.

Answer 11

A regulation. Member states have flexibility in the way they introduce directives

Question 12

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

Answer 12

The Bank of England for the UK and the European Systemic Risk Board (ESRB) for the EU.

Question 13

What are the government’s 4 main macroeconomic objectives?

Answer 13

1. Price stability;
2. Low unemployment;
3. Stable economic growth;
4. Balance of payments equilibrium;

Question 14

Define Inflation?

Answer 14

A sustained increase in the general level of prices of goods and services, resulting from “too much money chasing too few goods”. In more formal economic terminology, it can be defined as a situation where the rate of growth of the money supply is greater than the rate of growth of real goods and services.

Question 15

Define Disinflation?

Answer 15

A general fall in the price of goods and services. In other words, the inflation rate is below zero per cent – a negative inflation rate.

Question 16

Define Recession?

Answer 16

A significant decline in economic activity over a sustained period. Technically, it is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Question 17

Define Gross Domestic Product (GDP)?

Answer 17

GDP is a measurement of a country’s overall economic activity. Technically it is the monetary value of all the goods and services produced within the country (ie ‘domestically’) in a given period, eg one year.

Question 18

Define Bank Rate?

Answer 18

The rate at which the Bank of England lends to other financial institutions. In this text the term ‘Bank rate’ is used, but you might also see it written ‘Bank Rate’ or referred to as ‘base rate’.

Question 19

What is the inflation target? And what is the main measure of inflation?

Answer 19

The level of inflation that economists judge is appropriate to keep the national economy functioning efficiently. As we have seen, in the UK the inflation target (at the time of writing, January 2022) is 2 per cent, as measured by the Consumer Prices Index, with a 1 per cent maximum divergence either way. The Bank of England has responsibility for achievement of the government’s inflation target. Current and predicted future levels of inflation are a key consideration in setting the Bank rate.

Question 20

Define Direct Taxes?

Answer 20

Apply to individuals and their assets (income tax, capital gains tax, inheritance tax, National Insurance).

Question 21

Define Indirect Taxes?

Answer 21

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

Question 22

Define Fiscal Policy?

Answer 22

The adjustment of levels of taxation and public spending in a way that is intended to achieve the government’s macroeconomic objectives.

Question 23

Define Public Sector Net Cash Requirement?

Answer 23

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.

Question 24

What are 3 characteristics of Regulations?

Answer 24

Regulations:

1) Have general application.

2) Are binding in their entirety, both in respect of what is to be achieved and how it is to be achieved.

3) Are directly applicable in all member states (unless particular states have specific dispensation).

Question 25

What are 3 characteristics of Directives?

Answer 25

Directives:

1) Are binding upon each member state to which they are addressed as to the result to be achieved.

2) Each member state has discretion as to how they go about achieving the stated aim of the directive.

3) The directive objectives must be achieved within a specific timescale (typically two years) but exactly how they are achieved is left to the

Question 26

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

a) expanding.
b) remaining stable.
c) balancing
d) contracting.

Answer 26

d) contracting.

Question 27

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

a) 1–2%.
b) 1–3%.
c) 2–3%.
d) 3–4%.

Answer 27

b) 1–3%.

Question 28

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

a) Capital gains tax.
b) National Insurance.
c) Income tax.
d) Fuel duty.

Answer 28

d) Fuel duty.

Question 29

Which of the following is not a government macroeconomic objective?

a) Maximum employment levels.
b) Price stability.
c) Balance of payments equilibrium.
d) Economic growth.

Answer 29

a) Maximum employment levels.

Question 30

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

a) neither increase nor fall.
b) increase.
c) fall slightly.
d) collapse.

Answer 30

b) increase.

Question 31

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

a) European Insurance and Occupational Pensions Authority.
b) European Systemic Risk Board.
c) European Securities and Markets Agency.
d) European Banking Authority.

Answer 31

b) European Systemic Risk Board.

Question 32

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) negative inflation.
b) disinflation.
c) stagflation.
d) deflation.

Answer 32

b) disinflation.

Question 33

Which of the following best describes EU Directives?
They:

a) are automatically binding and member states must implement them exactly as stated in the directive.
b) must be implemented within 12 months of publication.
c) apply only to member states without similar legislation already in place.
d) describe the required outcome but leave member states to decide how they are achieved.

Answer 33

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

Question 34

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

a) 3.
b) 5.
c) 8.
d) 12.

Answer 34

c) 8.

Question 35

A recession is defined as:

a) two quarters of static GDP growth.
b) two quarters of negative GDP growth.
c) three quarters of rising inflation.
d) three quarters of negative GDP growth.

Answer 35

b) two quarters of negative GDP growth.

Question 36

What timescale must EU directives be implemented within?

Answer 36

Typically 2 years

Question 37

EU regulations are?

1) Binding to compliant member states
2) Binding to all member states
3) Binding to member states which are addressed

Answer 37

2) Binding to all member states

Question 38

EU directives are?

1) Binding to compliant member states
2) Binding to all member states
3) Binding to member states which are addressed

Answer 38

3) Binding to member states which are addressed

Question 39

Which of the following are not under the umberella of the European Supervisory Authority?

1) ESMA
2) EBA
3) EIOPA
4) ESRB

Answer 39

4) ESRB

To remember European Supervisory Authorities say:
I hope I ever ESMA
EIPA EBA ESMA

All of these sit under the umberella of ESRB