Unit 1 Topic 2 - Economic policy and financial regulation Flashcards
Define inflation, deflation and disinflation
Rate of money supply is greater than the rate of growth of real goods and services
A fall in rate of inflation
A general fall in the price of goods and services
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)
What are the key macroeconomic objectives?
- Price stability
- Low unemployment
- Balance of payments equilibrium
- Satisfactory economic growth
Which pairs do the macroeconomic objects tend to fall into?
- Policies to reduce unemployment will also boost growth
- Measures to reduce inflation will also help to improve balance of payments.
Define 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).
Define 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 are the four main phases economies typically go through?
- recovery and expansion;
- boom;
- contraction or slowdown; and
- recession
Explain the activity pattern of Recovery and expansion phase of economy cycles.
Interest rates, inflation and unemployment are low. Consumers have money to spend. Demand for goods and services rises, pushing prices up. Share prices improve as businesses flourish.
Explain the activity pattern of Boom phase of economy cycles.
To prevent the economy from overheating, the Bank of England may intervene by putting up interest rates to control consumer spending and dampen inflation.
Explain the activity pattern of Contraction/slowdown phase of economy cycles.
Once the interest rate rises start to bite, consumer spending falls. Demand for gods and services falls, profits fall (as do share prices) and unemployment rises. Inflation slows down.
Explain the activity pattern of Recession phase of economy cycles.
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.
Define 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 accurate reflection of consumer spending.
It is the equivalent of the Harmonised Index of Consumer Prices (HICP) used within the eurozone.
Define Monetary policy.
Measures taken to control the supply of money in the economy (eg by raising or lowering interest rates) in order to manage inflation.
Define Bank rate.
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’.
Define Inflation target.
The level of inflation that economists judge is appropriate to keep the national economy function efficiently.
As we have see, in the UK the inflation target (Feb 2019) is 2%, as measured by the CPI, with a 1% maximum divergence either way. The Bank of England has the 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.
