B Theory Flashcards
(128 cards)
1
Q
What is a macro economic policy?
A
Setting of economic objectives by the government (e.g. full employment, economic growth, the avoidance of inflation) and the use of control instruments to achieve those objectives
2
Q
Macro economic policy objectives (employment)
A
Full employment
3
Q
Macro economic policy objectives (wealth)
A
An acceptable distribution of wealth
4
Q
Macro economic policy objectives (economic)
A
Economic growth and thereby improved living standards
5
Q
What is a financial instrument?
A
A contract to a monetary asset
6
Q
What is meant by monetary policy (control)
A
Directly control the amount of money in circulation
7
Q
What is meant by monetary policy (demand)
A
Attempt to reduce the demand for money through its price (interest rates)
8
Q
Open market operations for directly controlling the market supply?
A
If the central bank sells government securities, the money supply is contracted, as some of the funds available in the market are “soaked up” by purchasing the government securities
9
Q
Reserve asset requirements for directly controlling the market supply?
A
The central bank can set a minimum level of liquid assets which banks must maintain. This limits their ability to lend and thereby reduces the money supply
10
Q
Special deposit for directly controlling the market supply?
A
These deposits do not count as part of the bank’s reserve base against which it can lend. They have the effect, therefore, of reducing the bank’s ability to lend and thereby reducing the money supply. Done by the central bank
11
Q
DIrect control for directly controlling the market supply?
A
The central bank may set specific limits on the amount banks lend. But credit controls can be easily circumvented
12
Q
How can governments reduce the demand for money and indirectly reduce the money supply?
A
By encouraging an increase in short-term interest rates
13
Q
Problem with monetary policy (lag)
A
A significant time lag often exists between implementing a policy and its effects
14
Q
Problem with monetary policy (control)
A
Credit control is ineffective in the modern global economy
15
Q
Increasing interest rates problems (demand)
A
Decreases in consumer demand
16
Q
Increasing interest rates problems (prices)
A
A downward pressure on share prices, making it more difficult for companies to raise funds from new share issues
17
Q
What is fiscal policy?
A
Government actions to achieve economic objectives through the fiscal instruments of taxation, public spending and the budget deficit or surplus
18
Q
How does fiscal policy reflate the economy (spending)
A
Increase government spending to increase the level of demand in the economy directly
19
Q
How does fiscal policy reflate the economy (taxation)
A
Reduce taxation to boost both consumption and investment
20
Q
Problems with fiscal policy reflating the economy (spending)
A
Government spending is an intervention in a free market, which can lead to the misallocation of resources
21
Q
Problems with fiscal policy reflating the economy (tax)
A
Tax cuts are not efficient at boosting domestic demand as, in times of recession, some of the extra disposable income made available will be saved
22
Q
What is a supply side policy?
A
Policies which focus on creating the right conditions in which private enterprise can grow and raise the capacity of the economy to provide the output demanded
23
Q
Example of supply side policies (tax)
A
Low corporate tax rates to encourage private enterprise
24
Q
Example of supply side policies (deregulaton)
A
Deregulation of industries
25
Example of supply side policies (training)
an increase in the training and education of the workforce
26
Example of supply side policies (trade)
A reduction in the power of trade unions
27
Advantage of supply side policies (private sector)
private sector is to be encouraged, tax rates should be kept to a minimum and government expenditure also should be kept to a minimum
28
Disadvantage of supply side policies (delay)
There is a time delay before the policies have any impact
29
Disadvantage of supply side policies (sector)
The private sector will not provide all the goods and services society requires
30
What is exchange rate policy?
How a government manages its currency in relation to foreign currencies
31
Reason for controlling exchange rate (stabilise)
To stabilise the exchange rate. If importers and exporters face less exchange rate risk, confidence in the currency will improve, facilitating international trade.
32
Main sources of demand in floating exchange rate?
Exports of goods, services
Speculative demand
33
Main sources of supply in floating exchange rate?
Imports of goods, services
Speculative selling
34
When imports exceed exports?
Supply of the home currency will exceed demand and the home currency will depreciate, boosting demand for exports and correcting the trade imbalance
35
Fixed exchange rate?
The rate is kept fixed against that of another currency, or basket of currencies. No fluctuations are permitted
36
Crawling peg?
Currency is allowed to fluctuate but only within a relatively narrow range around a target rate
37
Inflation?
The rate of increase of the general level of prices in the economy.
38
CPI?
A measure of the average change over time in the prices paid by consumers for a market basket of consumer goods and services
39
Demand-pull inflation meaning?
Inflation arises due to demand exceeding the maximum output of the economy with full employment
40
Cost-push inflation meaning?
Increases in the cost of raw materials or the cost of labour lead to increases in the unit costs of production
41
What are the general economic consequences of inflation (exchange)
A fall in the exchange rate
42
What are the general economic consequences of inflation (save)
A disincentive to save, as the purchasing power of investments may be reduced
43
What are the general economic consequences of inflation (interest)
A need for higher nominal interest rates
44
Consequences for inflation for a business (Entreprenuerial)
Entrepreneurial activity is reduced, as it is harder to estimate the likely returns from a new venture
45
Consequences for inflation for a business (competitiveness)
International competitiveness suffers where prices rise faster than those of foreign competitors
46
Consequences for inflation for a business (interest)
Higher interest rates reduce the number of profitable investment opportunities, reducing the level of investment.
47
Consequences for inflation for a business (uncertainty)
Increased uncertainty reduces new investment by existing businesses
48
Why do governments intervene in the free market (monopolies)
Monopolies, mergers or restrictive practices operate against the public interest
49
Why do governments intervene in the free market (national)
An industry is of national strategic importance
50
Why do governments intervene in the free market (injustice)
The free market creates social injustice
51
Benefits of privatisation (competition)
An increase in competition where a state monopoly is split into several operating companies
52
Benefits of privatisation (revenue)
A short-term boost to government revenues
53
Disadvantages of privatisation (quality)
The quality of service may deteriorate
54
Disadvantages of privatisation (monopolies)
The creation of private sector monopolies, which have then required regulation to ensure that their monopoly position is not abused
55
What is sustainability?
Meeting the needs of the present without compromising the ability of future generations to meet their own needs
56
An activity is environmentally sustainable if (climate)
Prevents climate change and pollution
57
An activity is environmentally sustainable if (harm)
Does no significant harm to any of the other objectives
58
An activity is environmentally sustainable if (safeguards)
Meets minimum social safeguards
59
Benefit of using the Euro (comparison)
The euro allows easy comparison of prices between member countries, leading to increased competition
60
Financial institutions that act as financial intermediaries?
Commercial banks
Insurance companies
Pension funds
61
What is aggregation within financial intermediaries
Small deposits are combined and lent to large borrowers
62
What is maturity tranformation within financial intermediaries
A continuing stream of short-term deposits can be used to lend monies in the long term.
63
What is risk diversification within financial intermediaries
The risk of each particular borrower is effectively spread across many lenders
64
What is liquidity within financial intermediaries
Providing a liquid market with flexibility and choice for lenders and borrowers
65
What is hedging within financial intermediaries
Providing businesses with instruments for hedging risk
66
What do commercial clearing banks do (deposit)
They accept deposits from their customers into current or deposit accounts
67
What do commercial clearing banks do (transmission)
They provide a money transmission service through the clearing system
68
Bank lending forms (overdraft)
Overdraft facilities and term loans to individuals and business customers.
69
Bank lending forms (commercial)
The purchase of trade or commercial bills
70
Bank lending forms (securities)
The purchase of short-term government securities
71
What does Islamic finance prohibit?
the payment or acceptance of interest (riba); and
investing in businesses that provide goods or services considered contrary to its principles.
72
Principle of Islamic finance (trade)
Wealth must be generated from legitimate trade
73
Principle of Islamic finance (shared)
Risk should be shared
74
Principle of Islamic finance (investment)
Investment should also have a social and ethical benefit to broader society beyond pure return
75
Prohibition of Islamic finance (interest)
Charging and receiving interest
76
Prohibition of Islamic finance (investment)
Investments in businesses dealing with alcohol, gambling, drugs, pork
77
Prohibition of Islamic finance (speculation)
Transactions which involve speculation or extreme risk, which is seen as gambling
78
What is murabaha
Trade credit for asset acquisition that is structured to avoid the payment of interest
79
What is ijara?
Lease finance whereby the bank buys an item for a customer and then leases it back over a specific period at an agreed amount
80
What is Mudabara?
A bank provides all the capital, and its customer provides expertise and knowledge and invests the capital
81
What is Musharaka?
A joint venture or partnership between two parties provides capital for financing new or established projects
82
What is Sukuk?
Involves Islamic bonds where the sukuk holders' return for providing finance is a share of the income generated by the project's assets
83
What is Hibah
Where Islamic banks voluntarily pay their customers a "gift" on savings account balances
84
What is Qard hassan?
Involves a loan extended on a goodwill basis, and the debtor is only required to repay the amount borrowed
85
What is primary market activity?
Selling new securities to raise new funds
86
What is secondary market activity?
Trading existing securities
87
Principal role of money markets (surplus)
Transfer money from parties with surplus funds to parties with a deficit
88
Principal role of money markets (interest)
Determine short-term interest rates
89
Principal role of money markets (monetary)
Help governments implement monetary policy
90
What is a certificate of deposit?
A savings certificate issued by a commercial bank entitling the holder to receive interest. CDs are generally issued for terms from one month to five years
91
What is a repurchase agreement?
Short-term loans arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a specified date
92
What are municipal notes?
Short-term debt issued by cities in anticipation of future tax receipts or other revenues
93
What is bill of exchange?
A short-term financial instrument consisting of a written order addressed by the seller of goods to the buyer requiring the latter to pay a certain sum of money on demand or at a future time
94
What is commercial paper?
Unsecured, but high-quality, corporate debt with a fixed maturity of one to 270 days. It is sold at a discount to nominal value and pays a zero coupo
95
What is banker's acceptance?
A short-term debt issued by a company that is guaranteed by a commercial bank. Maturity date typically ranges between 30 and 180 days
96
What are treasury bills?
Short-term debt obligations of a national government that are issued to mature in three to 12 months
97
Primary function of stock exchange (investors)
All investors deal on the same terms and at the same prices
98
Primary function of stock exchange (companies)
Only suitable companies are allowed to trade their securities on the stock exchange
99
What is a bullish investor?
Believes that prices will rise. Shares are bought in the hope of selling them for a profi
100
What is a bearish investor?
Believes that prices will fall. Shares are sold in the hope that they can be repurchased for less
101
What is an efficient market?
One in which the market price of all securities traded on it reflects all the available informatio
102
What is a perfect market?
One which responds immediately to the information made available to it
103
What does an efficient and perfect market ensure?
Quoted share prices are as fair as possible as they accurately and quickly reflect a company's financial performance
104
Weak-form efficiency?
Share prices reflect all the information contained in the record of past prices. Share prices will follow a random walk
105
Semi-strong form efficiency?
Share prices reflect all information currently publicly available. Therefore, the price will change only when new information is published
106
Strong-form efficiency?
Share prices reflect all information, published and unpublished, that is relevant to the company
107
Efficiency of stock market implications (creative accounting)
Unless a market is fully efficient, creative accounting can still be used to mislead investors.
108
Efficiency of stock market implications (Timing of new issues)
Unless the market is fully efficient, the timing of new issues remains important. This is because the market does not reflect all the relevant information
109
Nominal value of a corporate bond?
The price at which the bonds are initially issued
110
"Coupon" interest rate paid to the bond owner of a corporate bond?
Usually a fixed percentage of the nominal value
111
Redemption date of a corporate bond?
When the nominal value must be repaid to the bondholder
112
What is a public issue for bond market?
Corporate bonds can be issued through the stock exchange, similar to a public share issue
113
What is a private placement for bond market?
Bond issue to a relatively small number of selected investors such as banks, insurance companies and pension funds
114
Influences of interest rates (inflation)
Inflation, demand for borrowing
115
Influences of interest rates (level of risk)
Higher the level of risk, the greater return an investor will expect
116
Influences of interest rates (duration of the loan)
In the long-term, interest rates are expected to remain stable, then the longer the length of the loan, the higher the interest rate will be
117
What is liquidity preference theory?
Yields will need to rise as the term to maturity increases, as investors require higher returns as compensation for increased illiquidity of long-dated bonds
118
What is expectations theory?
If interest rates are expected to increase in the future, the curve may rise even more steeply
119
What is market segmentation theory?
Different investors have a preference for and are interested in different segments of the yield curve. Short-term yields preferred by banks and pension funds might prefer long-dated bonds
120
What is fintech?
Technologically enabled innovation in financial services that could result in new business models
121
What is disintermediation?
Involves transferring funds between parties directly, without a financial intermediary
122
How has fintech expanded the availability of credit?
By allowing borrowers rejected by the traditional banks to access the funding they need
123
P2P lending?
A method of debt financing that enables individuals to lend money to small businesses without using an official financial institution as an intermediary
124
What are STOs?
The first issue of tokens (or crypto coins) that represent an investment contract in an underlying asset
125
What is a security token?
A digital representation of ownership of a share in an asset (e.g. gold or property) or economic rights
126
Characteristics of perfect market (buyers)
Many buyers/sellers of the share
127
Characteristics of perfect market (zero)
Zero transaction costs
128
Characteristics of perfect market (rational)
Rational investors
