09. Macro-economics Flashcards
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 9 reluctance to take losses & change behaviour)
3
Q
Name 3 types of economic indicator.
A
- leading
- lagged
- coincident
4
Q
What are leading indicators and give an example.
A
- usually signal mvmnt in advance in wider economy
- e.g. stock market trends before mvmnts in real economy
5
Q
What are lagged indicators and give an example.
A
- usually change after overall economy changes
- e.g. employment moving after output changes
6
Q
What are coincident indicators and give an example.
A
- move in step with the wider economy
- include activity variables e.g. 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.
8
Q
How long on average are cycles from peak to trough?
A
5 yrs
9
Q
What is the output gap?
A
The loss of output resulting from ST fluctuations relative to potential LT output.
10
Q
Name the 3 ways to measure the circular flow of economic activity.
A
- value of expenditure by firms on inputs
- value of output by firms
- value of purchases by consumers
11
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
12
Q
What is GDP?
A
The value of output produced by factors of production located within the domestic economy.
13
Q
What is GNP?
A
GDP plus net income from abroad (i.e all factors)
14
Q
What are final goods vs intermediate goods?
A
- purchased by ultimate user
- inputs in another production process
15
Q
Calculating national income:
GDP (household income)
Y =
A
Consumption (household spending) C
Household saving S
Final expenditure on inv goods I
Y=C+S
Y=C+I
I=S
16
Q
GDP =
A
C + I + G - t + X - M
17
Q
S, M ty, t are all ___ ___ the circular flow of income.
A
leakages out of
18
Q
I, X & G are ___ ___ the circular flow of income.
A
injections in
19
Q
Private sector surplus of savings over investments
S - I =
A
Govt deficit expenditure over income
(G + T - t - ty)
+
Foreign sector surplus of exports over imports
(X-M)
20
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)
21
Q
If c = the marginal propensity to consume (MPC), the 1- MPS =
A
the marginal propensity to save (MPS)
22
Q
What is the basic principle of Classical economics?
A
The real economy as a whole is self-regulating in that it is always capable of achieving the natural level of real GDP.
23
Q
Under the classical & monetarist schools of thought, prices & wages are what?
A
Fully flexible.
24
Q
The Keynesian school describes an economy where prices and wages are what?
A
Fixed, or at least slow to adjust.
25
**Monetarist** economists argue that the focus should be what when considering inflation?
Monetary policy.
26
What does the **Austrian** school emphasise?
The role of individual or group actions (or inactions) to understand economic phenomena.
27
**Fiscal policy** is the govt.s decisions about what?
Spending & Taxation.
28
What is a **budget surplus**?
The diff between govt rev & spending
29
The budget deficit in the UK is also known as?
The public sector net cash requirement (PSNCR)
30
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**
31
What is **fractional reserve banking?**
Where only a small fraction of the liabilities are held as assets in cash form.
32
M0 =
Historic main narrow measure of money: sterling notes & coins outside BoE
33
M1 =
Notes & coins + non-interest bearing sight deposits held by non-bank private sector
34
What is M1 an indicator of?
Transactions in goods & services in the economy
35
M2 (or retail M4) =
Notes & coins + all retail deposits
36
M3 =
Notes & coins + all sight deposits held with banks
37
M4 =
Notes & coins, deposits, CDs, repos & securities with maturity < 5 yrs
38
M4ex =
M4 exc deposits of international offshore financial centres
39
Monetary base =
The quantity of notes & coins in private hands & held by the banking system.
40
Money multiplier =
The relationship between the diff definitions of money and changes in the monetary base
Money stock = MM x monetary base
41
The quantity theory of money =
MV = PT
where:
M is money
V is velocity
P is price level
T is level of transactions
42
3 main motives for holding money?
1. Transactions motive
2. Precautionary motive
3. Portfolio (or asset) motive
43
At lower int rates, the demand for money is?
Higher
44
**Frictional unemployment** =
Individuals who are between jobs, or who are not easily employable because of physical or similar problems.
45
Name 3 categories of frictional unemployment.
1. workers who have left their job
2. people returning to workforce
3. new entrants into workforce
46
**Structural unemployment** =
Changes in unemployment due to changes in demand or production patterns over time.
47
Why does **classical unemployment** exist?
Because there is too high a level of the real wage, so the labour market is not fully adjusted.
48
What does **Keynesian unemployment** refer to?
A demand deficiency brought about by the lack of flexibility of wages and prices required to restore classical full employment.
49
What is the natural rate of unemployment?
The rate of unemployment when the labour market is in equilibrium (therefore completely voluntary)
50
Is Keynesian unemployment voluntary or involuntary?
Involuntary
51
What does RPI exclude?
Mortg int payments
52
RPI composition will change to what in Feb 30?
CPIH
53
What did the **medium-term financial strategy (MTFS)** attempt to reduce and in what context?
Budget deficit to control inflation as high budget deficits were seen to lead to high money growth (since govt.s may print money to finance deficits)
54
What does the **Phillips curve** show?
Inverse relationship between unemployment & inflation
55
What is the John Taylor rule intended to reduce?
Uncertainty about economic policy and enhance policy credibility.
56
Under the John Taylor rule, for each 1% rise in inflation, the central bank should do what?
Raise the policy rate by more than 1%.
When inflation is above target or GDP is above full employment, the rule suggests a higher interest rate to slow the economy & reduce inflation.
57
What are the 2 depts of the BoE and what do they do?
1. **Issue dept**: exchanges bank notes for govt & other securities (**open market operation**)
2. **banking dept**: functions as a banker to both commercial banks & govt.
58
If the **required reserve ratio** is 5%, banks can create deposits of what?
20 times their cash reserves.
59
Another instrument of monetary policy is ___ ___ ___. What does this involve?
- **open market operations**
- A central bank influencing the monetary base by buying or selling securities on the open market.
60
Another monetary policy tool ids variation in the ___ ___. What is the ___ ___?
- **Repo rate**
- The int charged by the central bank for lending to the commercial banks.
61
When might a central bank adopt a QE policy?
When interest rates can't be reduced further to stimulate the economy through increased credit demand, the CB purchases financial assets, inc govt & corp bonds, using money created electronically.
62
What is **helicopter money**?
A form of monetary policy whereby the central bank finances fiscal stimulus through money creation.
63
What is a criticism of monetary finance?
It may lead to political influence over central bank actions.
64
What are **Basel III** rules?
A new set of capital & liquidity rules for banks to improve the regulation, supervision & risk mgt of banks.
65
Basel III rules involve a max leverage ratio (total bank assets to capital) of what?
4.5%
66
What is exchange market intervention?
Where a central bank has a particular target for the exchange rate and uses foreign exchange reserves to add to demand.
67
What does a **fixed exchange rate system** involve?
The govt adding to demand & supply of currencies with the aim of maintaining a particular target exchange rate.
68
What is a **floating exchange rate system**?
No foreign exchange intervention and price is allowed to attain its free mkt equilibrium.
69
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**
70
What is the BoP?
Record of transactions between one country and rest of world.
71
Under BoP, what is the **current account**?
The flow of goods & services & other net income from abroad.
72
Under BoP, what is the **capital account**?
The flow of transactions in financial assets.
73
Under BoP, what is the **visible trade**?
Trade in goods.
74
Under BoP, what is the **invisible trade**?
Trade in services.
75
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
76
What is **purchasing power parity (PPP)**?
This is when (nominal) exchange rates move to offset the differential inflation rates between countries.
77
Fixed exchange rate pros? [2]
+ reduce uncertainty in international transactions
+ encourage trade & investment
78
Floating exchange rate pro?
+ Allow economies to adjust their relative costs & wages through exchange rates rather than through internal devaluation
79
What is an **optimal currency area (OCA)**?
A geographic region created to maximise a region's economic efficiency through use of a single currency.
80
FX transactions on the FOREX mkt that are for immediate delivery of foreign currency take place where, and are usually settled within how long?
- The **spot mkt**
- Within 2 WDs
81
The ** market maker's spread** ios the diff between what?
The **bid price** (buy) and the **ask price** (sell)
82
What are **forward market transactions**?
An agreement to buy currency at a future date and at a fixed price agreed now.
83
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
84
Fwd premiums are ___ spot price and fwd discounts are ___ to current spot price.
- subtracted from [PS]
- added to
85
What is **interest rate parity**?
Arbitrage - relationship between a currency's fwd premium and the int rate
86
What does the **Fisher effect** state?
That int rates in an economy fully reflect expected inflation.
87
What is **covered interest parity**?
The relationship between fwd rates and the interest differential.
88
How do we have **uncovered interest**?
If we replace the fwd premium with the expected change in the spot exchange rate i.e. the expected change in exchange rate reflects current int differentials on the currencies.
