Financial Management Environment (2)

Question 1

Why are macroeconomic policies adopted?

Answer 1

To achieve full employment, acceptable distribution of wealth, enhance growth

(Anything whole society)

Question 2

What is monetary policy?

Answer 2

How governments achieve economic objectives using moentary instruments

Question 3

What is a financial instrument?

Answer 3

A contract for a monetary asset

Question 4

Monetary policy actions?

Answer 4

Reduce demand of money through interest rates

Question 5

Effect of increase in interest rate?

Answer 5

Increases the cost of borrowing

Question 6

Open market operaitons?

Answer 6

If the central bank sells government securities, the money supply is contracted

Question 7

What do open market operations lead to?

Answer 7

A reduction in bank deposits due to the level of funds that have been soaked up

Question 8

If central bank were to buy back securities?

Answer 8

Funds would be released into the market

Question 9

What are reserve asset requirements?

Answer 9

The central bank can set a minimum level of liquid assets which banks must maintain

Question 10

What are special deposits?

Answer 10

Reduces the bank’s ability to lend and thereby reducing the money supply

Question 11

What is direct control for a bank?

Answer 11

Central bank may set specific limits on the amount which banks may lend

Question 12

Issue with increasing interest rates?

Answer 12

Less investment
Downward pressure on share prices
Overvalued currency

Question 13

Issue with monetary policy?

Answer 13

Time lag between implementation and effects
Credit control not effective

Question 14

What is fiscal policy?

Answer 14

How governemnts achieve economic objectives through taxation, public spending and the budget deficit or surplus

Question 15

Benefits of fiscal policy in a recession?

Answer 15

Increase government spending to improve demand

Reduce taxation to boost consumption

Question 16

Issue with inflating economy through fiscal?

Answer 16

Significant time lag
A large budget deficit is likely to occur
The rate of inflation is likely to rise

Question 17

Relationship between fiscal and monetary?

Answer 17

They are both independent

Question 18

How can fiscal policy reduce demand?

Answer 18

Reduce government spending
Increase taxation

Question 19

Supply side policies?

Answer 19

The private sector is deemed to be more efficient at providing the output required than the public sector.

Question 20

What do supply side policies include?

Answer 20

Low corporate tax rates
Limited government spending
Deregulation of industries

Question 21

What should government spending not exceed in supply side?

Answer 21

Government receipts from taxation

Question 22

If private sector is encouraged?

Answer 22

Tax rates should be kept to a minimum and government expenditure also should be kept to a minimum

Question 23

Problems with supply side?

Answer 23

Time delay before the policies have any impact
The private sector will not provide all the goods and services for society

Question 24

What is an exchange rate policy?

Answer 24

The way a government manages its currency in relation to foreign currencies

Question 25

Reasons for controlling exchange rates?

Answer 25

To rectify a balance of trade deficit
To prevent a balance of trade surplus
To stabilise the exchange rate

Question 26

What is a freely floating exchange rate?

Answer 26

The value of the currency is allowed to move freely with supply and demand market forces

Question 27

Main sources of demand?

Answer 27

Exports of goods and services
Inflow of foreign investment
Speculative demand

Question 28

Main sources of supply?

Answer 28

Imports of goods and services
Outflow of foreign investment
Speculative selling

Question 29

What is a fixed exchange rate?

Answer 29

One in which the rate is kept fixed against that of another currency. No fluctuations are permitted

Question 30

What is crawling peg?

Answer 30

Allowed to fluctuate but only within a relatively narrow range around a target rate