09. Macro-economics Flashcards
(90 cards)
1
Q
Name 2 potential causes of financial crises.
A
- PE ratio much higher than normal
- house prices to income v high
- bad macro-economic news trigger
2
Q
Name 3 aspects of behavioural finance.
A
- cognitive dissonance (dismissal of inconvenient evidence)
- herding & groupthink
- illusion of control & overconfidence
- disposition effect (reluctance to take losses & change behaviour)
3
Q
Name 3 types of economic indicator.
A
- leading
- lagged
- coincident
4
Q
Leading indicators usually signal mvmnt ___ in wider economy.
e.g. ___ before mvmnts in real economy.
A
- in advance
- stock market trends
5
Q
Lagged indicators usually change ___ overall economy changes.
e.g. ___ moving after output changes
A
- after
- employment
6
Q
Coincident indicators move ___ with the wider economy.
These include activity variables e.g. ___ & ___.
A
- in step
- production & GDP
7
Q
Business cycles typically have 4 phases. What are they?
A
- Expansionary phase - production rises, inflation & int rates are low
- Euphoric phase - leading to overconfidence… falling stock prices… rising int rates & bankruptices
- Recession - output & inventories cut back
- Recovery - consumers regain confidence, demand & output rise.
EERR
8
Q
How long on average are cycles from peak to trough?
A
5 yrs
9
Q
The output gap is the loss of output resulting from ___ relative to potential ___.
A
- ST fluctuations
- LT output
10
Q
Name the 3 ways to measure the circular flow of economic activity.
A
Value of :
- expenditure by firms on inputs
- output by firms
- purchases by consumers
11
Q
National income equals GNP at ___ less ___.
A
- factor cost
- capital dep’n
12
Q
What is the measurement of economic activity within the framework of the value of firms expenditure / output / consumer expenditure known as?
A
National income accounting
13
Q
GDP is the ___ produced by factors of production located within the ___.
A
- value of output
- domestic economy
14
Q
GNP is GDP plus ___ (i.e all factors).
A
net income from abroad
15
Q
What are final goods vs intermediate goods?
A
- purchased by ultimate user
- inputs in another production process
16
Q
What is the formula for the consumption function?
A
C = a + cYD
where a = autonomous consumption (min level of consumption spending required to survive if income is zero)
cYD = consumption based on personal disposable income)
17
Q
If c = the marginal propensity to consume (MPC), then 1- MPS =
A
the marginal propensity to save (MPS)
18
Q
Multiplier =
A
1
/
1 - (c - e)
c = MPC
e = marginal propensity to import
19
Q
The basic principle of Classical economics is that the real economy as a whole is ___ in that it is always capable of achieving the ___.
A
- self-regulating
- natural level of real GDP
20
Q
An equal change in govt taxation & revenue is a ___ change.
A
balanced budget
21
Q
The use of monetary & fiscal policy to stabilise aggregate demand is known as ___.
A
demand mgt
22
Q
Under the classical & monetarist schools of thought, prices & wages are what?
A
Fully flexible.
23
Q
The Keynesian school describes an economy where prices and wages are what?
A
Fixed, or at least slow to adjust.
24
Q
Monetarist economists argue that the focus should be what when considering inflation?
A
Monetary policy.
25
The **Austrian** school emphasises the role of ___ or ___ (or ___) to understand economic phenomena.
- individual or group actions
- (or inactions)
26
**Fiscal policy** is the govt.s decisions about what? [2]
Spending & Taxation.
27
**Budget surplus** is the difference between ___.
govt rev & spending
28
The budget deficit in the UK is also known as?
The public sector net cash requirement (PSNCR)
29
What are the 2 types of **fiscal policy** and what are they?
- **Discretionary policy**: decided & implemented as specific policy changes
- **Automatic stabilisation policy** a.k.a. **fiscal drag**
30
**Fractional reserve banking** is where ___ of the liabilities are held as ___.
- small fraction
- assets in cash form
31
M0 is the historic ___ measure of money, consisting of? [2]
- narrow
- sterling notes
- & coins outside BoE
32
M1 [3]
- notes
- coins
- non-interest bearing sight deposits held by non-bank private sector
*NIBS deposits*
33
M1 an indicator of ___ in ___ in the economy.
- transactions
- goods & services
34
M2 (or retail M4) [3]
- notes
- coins
- all retail deposits
35
M3 [3]
- notes
- coins
- all sight deposits held with banks
36
M4 [6]
- Notes
- coins
- deposits
- CDs
- repos
- securities with maturity < 5 yrs
37
M4ex consists of what?
M4 exc deposits of international offshore financial centres
38
**Monetary base** refers to the quantity of notes & coins in ___ & held by ___.
- private hands
- the banking system
39
**Money multiplier** is the relationship between the diff ___ and changes in the ___.
Money stock =
- definitions of money
- monetary base
Money stock = MM x monetary base
40
The **quantity theory of money** =
MV = PT
where:
M is money
V is velocity
P is price level
T is level of transactions
41
3 main motives for holding money?
1. Transactions motive
2. Precautionary motive
3. Portfolio (or asset) motive
*TranPrePo*
42
At lower int rates, the demand for money is?
Higher
43
**Frictional unemployment** is where individuals who are ___ or who are ___ because of ___ or similar problems.
- between jobs
- not easily employable
- physical
44
Name 3 categories of frictional unemployment.
1. workers who have left their job
2. people returning to workforce
3. new entrants into workforce
45
**Structural unemployment** refers to changes in unemployment due to changes ___ or ___ over time.
- in demand
- production patterns
46
**Classical unemployment** exists because there is too ___ a level of the ___, so the ___ is not fully adjusted.
- high
- real wage
- labour market
47
**Keynesian unemployment** refers to a ___ brought about by the lack of flexibility of ___ & ___ required to restore classical full employment.
- demand deficiency
- wages
- and prices
48
The **natural rate of unemployment** is the rate of unemployment when the labour market is ___ (therefore completely ___).
- in equilibrium
- voluntary
49
Is Keynesian unemployment voluntary or involuntary?
Involuntary
50
What does RPI exclude?
Mortg int payments
51
RPI composition will change to what in Feb 30?
CPIH
52
The **medium-term financial strategy (MTFS)** attempts to reduce ___ to control ___ as high ___ were seen to lead to ___ (since govt.s may ___ to finance them).
- budget deficit
- inflation
- budget deficits
- high money growth
- print money
53
The **Phillips curve** shows the ___ relationship between ___ & ___.
- inverse
- unemployment & inflation
54
The **John Taylor rule** is intended to reduce ___ about ___ and enhance ___.
- uncertainty
- economic policy
- policy credibility
55
Under the John Taylor rule, for each 1% rise in inflation, the central bank should do what?
When inflation is above target or GDP is above full employment, the rule suggests a ___ interest rate to slow the ___ & reduce ___.
- Raise the policy rate by more than 1%.
- higher
- economy
- inflation
56
Who are the 2 depts of the BoE and what do they do?
1. ___ dept: exchanges ___ for govt & other securities (**open market operation**)
2. ___ dept: functions as a ___ to both ___ & ___.
- Issue dept
- bank notes
- banking dept
- banker
- commercial banks & govt
57
If the **required reserve ratio** is 5%, banks can create deposits of what?
20 times their cash reserves.
58
Another instrument of monetary policy is **open mkt operations**.
This involves a ___ influencing the monetary base by ___ or ___ securities on the ___.
- central bank
- buying or selling
- open market
59
Another monetary policy tool is variation in the **repo rate**.
This is the ___ by the central bank for ___ the commercial banks.
- interest charged
- lending to
60
A central bank might adopt a QE policy when ___ can't be reduced further to ___ through increased credit demand.
The ___ purchases financial assets, inc govt & corp bonds, using money created ___.
- interest rates
- stimulate the economy
- central bank
- electronically
61
**Helicopter money** is a form of ___ whereby the central bank finances fiscal stimulus through ___.
- monetary policy
- money creation
62
A criticism of monetary finance is that it may lead to ___ over ___ actions.
- political influence
- central bank
63
**Basel III** rules are a new set of ___ & ___ rules for banks to improve the regulation, supervision & risk mgt of banks.
capital & liquidity
64
**Basel III** rules involve a max leverage ratio (total bank assets to capital) of ___%.
4.5%
65
**Exchange market intervention** is where a central bank has a particular ___ for the exchange rate and uses ___ to add to demand.
- target
- foreign exchange reserves
66
A **fixed exchange rate system** involves the govt adding to ___ & ___ of currencies with the aim of maintaining a particular ___.
- demand & supply
- target exchange rate
67
A **floating exchange rate system** is where there is ___ and ___ is allowed to attain its free mkt equilibrium.
- no foreign exchange intervention
- price
68
What is the exchange rate system called where there is some intervention to coax the rate in a particular direction following a big shift in demand or supply, with no fixed target in mind?
**Dirty floating regime**
69
The **BoP** is the record of transactions between ___ and ___.
- one country
- rest of world
70
Under BoP, the **current account** is the flow of ___ & other ___ from ___.
- goods & services
- net income
- abroad
71
Under BoP, the **capital account** is the flow of transactions in ___.
financial assets
72
Under BoP, what is the **visible trade**?
Trade in goods.
73
Under BoP, what is the **invisible trade**?
Trade in services.
74
Under a fixed exchange rate with perfectly mobile capital, monetary policy is ___, but is ___ in the ST under floating rates.
(Opposite for fiscal policy)
- ineffective
- useful
75
**Purchasing power parity (PPP)** is when (nominal) ___ move to offset the differential ___ between countries.
- exchange rates
- inflation rates
76
Fixed exchange rate pros? [2]
- reduces uncertainty in international transactions
- encourages trade & investment
77
Floating exchange rate pro is that it allows economies to adjust their relative ___ & ___through exchange rates rather than through ___.
- costs & wages
- internal devaluation
78
**Optimal currency area (OCA)** is a geographic region created to ___ a region's economic ___ through use of a ___.
- maximise
- efficiency
- single currency
79
FX transactions on the FOREX mkt that are for immediate delivery of foreign currency take place on the ___ and are usually settled within ___.
- spot mkt
- 2 WDs
80
The ** market maker's spread** is the diff between what?
- The **bid price** (buy) ;and
- the **ask price** (sell)
81
**Forward market transactions** are an agreement to ___ at a ___ and at a ___ agreed now.
- buy currency
- future date
- fixed price
82
Under fwd mkt transactions, when is a currency said to be trading at a premium and a discount?
- premium: fwd price > spot price
- discount: fwd price < spot price
83
Fwd premiums are ___ spot price and fwd discounts are ___ to current spot price.
- subtracted from [PS]
- added to
84
**Interest rate parity** relates to arbitrage - relationship between a currency's ___ and the ___.
- fwd premium
- interest rate
85
The **Fisher effect** states that ___ in an economy fully reflect ___.
- interest rates
- expected inflation
86
Fisher effect =
(1+R) = (1+r) (1+E(i))
where R = nominal int rate
r = real int rate
E(i) = expected rate of inflation
87
International Fisher effect hypothesis states that there will be a ___ for each economy (currency), and that if investors can choose which currency to invest in without restriction, the ___ will be the same everywhere.
- real interest rate x2
88
IFE =
If 1+r£ = 1+r$
(1+R£) / (1+E(i£)) = (1+R$) / (1+E(i$))
89
**Covered interest parity** refers to the relationship between ___ and the ___.
- fwd rates
- interest differential
90
We have **uncovered interest** if we replace the fwd premium with the expected change in the ___.
spot exchange rate
