Chapter 2: Financial Management Environment

Question 1

Main macroeconomic policy targets

Answer 1

Strengthening business to make the economy more competitive

Protecting the environment

Increasing employment opportunities

Ensuring fairness for families and communities

Delivering macro economic stability to encourage long term planning and investment

Question 2

Fiscal policy

Answer 2

Determines how government raises and spends money:

-taxation and government spending affect the amount that companies and individuals have available for spending and hence the impact on demand and output

-Hence increasing taxation levels or decreasing public expenditure should decrease demand and output

Question 3

Monetary policy

Answer 3

Used by governments to regulate the supply of money

-broad aim to achieve price stability
-one aspect is interest rate policy, central banks change interest rates to change the price of and hence demand for money
-increasing the supply of money should make borrowing cheaper and hence increase demand

Question 4

Quantitative easing

Answer 4

Central banks can increase the supply of money by repurchasing Government Debt from banks

Question 5

Exchange rate policy

Answer 5

describes Government’s attempts to influence exchange rates:

-current uk policy is to allow a free or floating exchange rate (demand and supply set the exchange rate)
-alternatives include managed and fixed change rates policies

Question 6

Competition policy

Answer 6

Strong competition should benefit consumers through lower prices, fairer pricing and improved innovation

However, too much power/market share by a few large suppliers could lead to price fixing or limitation of supply leading to higher prices and lower quality products

Government may counteract this by setting max prices/minimum service levels, creating bodies to regulate takeovers

Question 7

Government assistance for business

Answer 7

May wish to encourage certain behaviour but without assistance it may not be economically viable

-government can offer assistance through tax breaks or grants

Question 8

Green policies

Answer 8

benefit society as a whole and are only effective is followed by virtually everyone, however tend to have economic cost

Government can influence correct environmental behaviour by
-incentivising greener business activities (favourable tax treatments etc)
-punishing businesses who pollute

Question 9

Sustainability

Answer 9

Meeting the needs of the present without compromising the ability of future generations to meet their needs

Question 10

money markets v capital markets

Answer 10

Money markets
-short term interest rate markets for investing and borrowing
-manage their working capital

Capital markets
-long term(over 12m) debt and equity markets
-manage their capital structure

Question 11

Primary v secondary markets

Answer 11

primary
-initial issue

secondary
-securities are traded once they have been issued

Question 12

Role of money markets

Answer 12

-Providing short term liquidity to industry and the public sector

-providing short term trade finance

-Allowing an organisation to manage its exposure to foreign currency risk and interest rate risk

Question 13

Functions of a stock market

Answer 13

enable companies to raise new finance
enable existing investors to sell their investment
To aid takeovers by issuing shares to finance the takeover
private company shareholders to realise part/all of their investment by floating the company

Question 14

Functions of a corporate bond market

Answer 14

enable companies to deal directly with lenders

enable companies to raise new debt finance

enable existing debt investors to sell their debts

aid takeovers by issuing debt to finance takeover