unit 1 topic 2- economic policy Flashcards
What is inflation?
A general rise in prices, 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.
What is disinflation?
A fall in the rate of inflation, ie prices are still rising, but less quickly than they were.
What is deflation?
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.
What are the key 4 macroeconomic objectives?
1) Price stability2) Low unemployment 3) Balance of payments equilibrium4) Satisfactory economic growth
What is RECESSION
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).
What is GROSS DOMESTIC PRODUCT (GDP)?
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.
What is the CONSUMER PRICES INDEX?
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.
What is the average annual rate of inflation set by the government and what is the maximum divergence % either side?
2% with 1% divergence
What are the two major types of policy used by governments in their attempt to achieve long‐term economic objectives?
monetary policy and fiscal policy.
Who retains the right to give instructions to the Bank of England regarding its monetary policy in ‘extreme economic circumstances’?
The Treasury (otherwise the Bank acts independently of the government.)
Who sets the Interest rates?
Set by the Bank of England’s Monetary Policy Committee (MPC).
What are DIRECT TAXES?
Apply to individuals and their assets (income tax, capital gains tax, inheritance tax, National Insurance).
What are INDIRECT TAXES?
Applied to goods and services at the time they are purchased (eg VAT, stamp duty).
Definition of Balanced budget?
Effect on economy is neutral – amount taken in tax is put back into public spending
Definition of Budget surplus?
Amount taken in taxation is greater than amount put back in to public spending – the economy contracts
Definition of Budget deficit?
Public spending is greater than amount taken in taxation – economy expands
What is FISCAL POLICY?
The adjustment of levels of taxation and public spending in a way that is intended to achieve the government’s macroeconomic objectives
What is Monetary policy?
Acts on the economy as a whole, currently through changes in the general level of interest rates
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.
c) is bound by the regulation in its entirety regardless of existing legislation.
What are the two main types of European legislation that impacts on the UK financial industry?
regulations and directives
What are the 2 main regulatory bodies in the UK ?
Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
What are the 5 levels of regulatory oversight in the UK?
Level 1 - European legislationLevel 2 - Acts of ParliamentLevel 3 - Regulatory bodiesLevel 4 - Policies/practices of the financial institutionLevel 5 - Arbitration schemes (eg Financial Ombudsman Scheme)
What is meant by a ‘macroeconomic objective’?
An objective that relates to the economy as a whole, rather than to a specific sector or individual company.
What is a potential negative consequence of expanding economic growth to reduce unemployment?
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.
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.
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.
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.
c) Prices are rising but more slowly than previously.
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.
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.
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.
b) Increasing public spending. To achieve a budget surplus a government must cut public spending, raise taxes, or both.
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.
A regulation. Member states have flexibility in the way they introduce directives.
Which EU body is responsible for monitoring the financial system for systemic risk and taking steps to reduce it?
The European Systemic Risk Board (ESRB).
