Chapter 5 Flashcards
(96 cards)
1
Q
What is the main objective of the syllabus related to environmental influences?
A
Demonstrate knowledge of the influences over the commercial and economic environment
This includes factors like central banks, main investor classes, and government policy.
2
Q
What are the three main sections of the chapter on environmental influences?
A
- Roles of central banks
- Classification of main investors
- Impact of government policy
3
Q
How does the influence of central banks vary?
A
It varies according to the division of power between government ministries, central banks, and regulatory bodies.
4
Q
What is the degree of independence of the central bank in the US?
A
Fully independent from the government.
5
Q
What power does the Bank of England have?
A
The power to set short-term interest rates to meet the UK Government’s inflation target.
6
Q
What is the UK Government’s inflation target based on?
A
The Consumer Price Index (CPI).
7
Q
What does a central bank focus on?
A
- Monetary policy
- Interest rate policy
- Banking regulation
- Financial market integrity
- Currency market intervention
- Taxation
8
Q
What is the role of the Financial Policy Committee (FPC)?
A
Focuses on higher-level systemic risks to the financial system.
9
Q
What are open market operations (OMOs)?
A
Buying and selling bills by the central bank to influence banking sector liquidity and short-term interest rates.
10
Q
What is quantitative easing (QE)?
A
A monetary policy used by central banks to increase the supply of money.
11
Q
What does QE usually involve?
A
- Direct increase in the money supply
- Knock-on effect from the fractional reserve system
12
Q
What is the fractional reserve system?
A
Banks hold only a fraction of deposits as reserves and loan the rest.
13
Q
What does Forward Guidance aim to do?
A
Indicate how the central bank believes monetary policy will change in the future.
14
Q
What is the base rate in the UK?
A
The overnight rate set by the central bank at which it provides liquidity.
15
Q
Who are the main investor classes?
A
- Private individuals (households)
- Financial intermediaries
- Corporates (businesses)
- Foreign investors
16
Q
What is a characteristic of the classification of investors?
A
It isn’t a cut-and-dry classification; institutions may not fit neatly into one group.
17
Q
What are some examples of parties involved in investment markets?
A
- Governments
- Government agencies
- Central banks
- Regulators
18
Q
Fill in the blank: The main economic variable that the money supply is used to control is __________.
A
Adjustment of banking sector liquidity.
19
Q
True or False: The Bank of England has complete independence from the UK Government.
A
False.
20
Q
What is the significance of forward guidance for monetary policy?
A
It helps reduce uncertainty about the future path of monetary policy.
21
Q
What parties are involved in the investment markets besides investors?
A
Governments, government agencies, central banks, regulators
These parties play various roles in the functioning of investment markets.
22
Q
What factors can influence different categories of investors?
A
- Time horizons
- Appetite for risk
- Taxation position
These factors can vary significantly among different investors.
23
Q
How can investments be perceived differently by various investors?
A
Investments considered risky for one investor may be less or more risky for another based on their liability profiles
This highlights the subjective nature of investment risk.
24
Q
What is an example of a risk-free investment for one investor but risky for another?
A
Fixed-interest government bonds
Risk perception can change based on the investor’s liabilities.
25
What is a key consideration for households when making investment decisions?
Diversification
## Footnote
Households often have limited wealth and face unique financial circumstances.
26
What are some considerations for households when investing?
* Liabilities
* Liquidity
* Uncertainty over future income
* Tax
* Level of investment expertise
* Stability of asset values
* Investment and risk characteristics of available assets
* Attitude to risk
## Footnote
These factors can significantly influence household investment behavior.
27
What role do financial intermediaries play in the investment process?
They channel resources between lenders (investors) and borrowers
## Footnote
This function is essential for efficient market operation.
28
What are some examples of financial intermediaries?
* Banks
* Insurance companies
* Pension funds
* Collective investment vehicles
## Footnote
Each type of intermediary serves a unique function in the financial system.
29
What advantages do financial intermediaries offer compared to direct investment?
* Pool resources of small investors
* Achieve significant diversification
* Build expertise through volume
* Lower costs through economies of scale
## Footnote
These advantages make intermediaries attractive for small investors.
30
What are 'real assets' as referred to in the context of businesses?
Assets used by the business to generate profits, such as buildings and machinery
## Footnote
This differentiates them from financial investments.
31
What objectives do businesses typically have when issuing securities?
* Get the best possible price
* Market the issues at the lowest possible cost
* Issue securities that meet their funding requirements
## Footnote
Achieving these objectives is crucial for effective capital raising.
32
What is the role of investment banks in the securities issuance process?
* Advise on pricing
* Handle marketing of the security issue
* Protect reputation by certifying information quality
* Innovate security design and packaging
## Footnote
Investment banks facilitate the complex process of raising funds in the market.
33
How do foreign investors influence investment markets?
Their role reflects the attractiveness of the market and is influenced by factors like currency movements and local regulations
## Footnote
Globalization has amplified the importance of foreign investors.
34
What critical roles do governments play in investment markets?
* Borrowing to finance expenditure
* Being deemed the most creditworthy borrowers
## Footnote
Governments leverage their creditworthiness to secure favorable borrowing conditions.
35
What are the two main types of securities issued by national governments?
T-bills and government bonds
## Footnote
These securities are fundamental tools for government financing.
36
In addition to borrowing, what other sources of finance do governments have?
Raising taxes and printing money
## Footnote
These methods provide governments with alternatives to traditional borrowing.
37
What are the two main types of security issued by national governments?
1. Bonds
2. Treasury bills
38
In addition to borrowing, what other sources of finance are available to governments?
Regulating the financial environment
## Footnote
Governments may also influence financial markets through regulations and tax rules.
39
What is monetary policy?
Control of the money supply and/or interest rates
40
What is fiscal policy?
Decisions on taxation and government expenditure
41
What is the public sector borrowing requirement (PSBR)?
The excess of government expenditure over government income from taxation
42
What is national debt management policy?
Manipulation of government debt instruments to influence interest rates
43
What does exchange rate policy aim to achieve?
Target for the exchange rate of the domestic currency
44
What is the relationship between currency exchange rates and competitiveness?
Lower domestic currency value increases competitiveness
45
What do prices and incomes policies aim to control?
Rates of wage and price inflation
46
What is competition policy?
Regulation of competition within markets
47
What is an oligopolistic industry?
An industry dominated by a small number of firms
48
What role does the Competition Commission play in the UK?
Responsible for competition issues
49
What factors do labour policies influence?
Flexibility of labour and bargaining power of organised labour
50
What are examples of labour policies?
Trade union powers and minimum wage legislation
51
What are government incentives for investment?
Grants, subsidies, and tax breaks for investment
52
What is demand management?
Use of fiscal and monetary policy to stabilize economic activity
53
Why was monetary policy less emphasized before the 1970s?
Governments focused on fiscal policy and full employment
54
What significant change occurred in monetary policy from the 1970s onwards?
Increased focus on controlling the money supply to fight inflation
55
What is the monetarist view regarding demand management policies?
They distort the economy away from equilibrium
56
Fill in the blank: The public sector debt repayment (PSDR) occurs when the PSBR is _______.
Negative
57
True or False: The government considers each form of policy in isolation.
False
58
What is the monetarist view regarding demand management policies?
Demand management policies distort the economy and move it away from equilibrium.
59
What do monetarists focus on to achieve economic equilibrium?
Achieving low inflation.
60
What is the goal of the Medium Term Financial Strategy (MTFS) in the UK?
To reduce inflation and the burden of taxation on the working population.
61
What does the MTFS involve?
Setting targets for key variables like money supply and PSBR over four years.
62
What are the basic aims of the MTFS?
* Low inflation
* Increased economic growth
63
How does reduced taxation of the working population contribute to economic growth?
It increases the incentive to work harder.
64
What is one way to encourage greater investment according to the MTFS?
Increase economic certainty leading to greater business confidence.
65
What are the implications of globalization for tax policy?
Pressure to reduce taxes, particularly corporate income tax rates.
66
What is a common strategy companies use to minimize tax liabilities?
Shifting profits to locations with more favorable tax treatment.
67
What are two major elements of the balance of payments?
* Current account
* Financial account
68
What is the likely effect of higher interest rates on personal sector expenditure?
It will reduce disposable income and discourage expenditure.
69
How do higher interest rates affect corporate profitability?
They increase interest payments on outstanding debt.
70
What is a potential impact of higher domestic interest rates on the balance of payments?
Attract an inflow of foreign investment funds.
71
What happens to the exchange rate when domestic interest rates increase?
There is likely to be upward pressure on the domestic currency's exchange rate.
72
What can happen to net exports if the exchange rate rises?
There will likely be a reduction in the value of net exports.
73
What is the role of central banks in monetary policy?
Setting interest rates to control inflation.
74
What are some functions of central banks beyond monetary policy?
* Banking regulation
* Implementation of government borrowing
* Intervention in currency markets
75
How can investors be classified?
* Households
* Financial intermediaries
* Businesses
* Foreign investors
76
What is often a key consideration for households when making investment decisions?
The need for diversification.
77
What advantages do financial intermediaries offer?
* Pooling of investors' resources
* Diversification
* Expertise
78
What are the four classifications of investors?
Households, financial intermediaries, businesses, foreign investors.
## Footnote
These classifications help in understanding the different roles and influences each group has in the investment landscape.
79
Why is diversification a key consideration for households in investment decisions?
To mitigate risk.
## Footnote
Diversification helps spread risk across different assets, reducing the impact of poor performance in any single investment.
80
What advantages do financial intermediaries offer?
* Pooling of investors' resources
* Enabling lending of large amounts
* Diversification
* Expertise
* Lower costs
## Footnote
These advantages make financial intermediaries critical in facilitating investments and managing risks.
81
What roles do investment banks play for businesses?
* Advise on the price to be charged
* Handle the marketing of the issue
* Verify the quality of the information supplied
* Innovate security design and packaging
## Footnote
Investment banks are essential in managing the process of issuing new securities and maximizing finance raised.
82
List the main forms of government policy that influence investment markets.
* Monetary policy
* Fiscal policy
* National debt management policy
* Exchange rate policy
* Prices and incomes policy
## Footnote
These policies can significantly impact the economic environment and investor behavior.
83
How do interest rates affect the economy?
* Personal sector expenditure
* Business sector investment and economic growth prospects
* Corporate profitability
* The balance of payments
## Footnote
Interest rates are a crucial factor in determining the overall health of the economy.
84
True or False: Companies can legally avoid taxes by using high transfer pricing.
True.
## Footnote
High transfer pricing can be a method used by companies to reduce taxable profits in high-tax jurisdictions.
85
Fill in the blank: Banks expand the money supply through _______.
[lending].
## Footnote
This process is regulated by the need to maintain minimum liquid reserves.
86
What is the effect of minimum liquid reserve ratios on banks?
They restrict the ability of banks to expand the money supply.
## Footnote
Minimum reserve ratios determine how much money banks can lend out.
87
What is the consequence of setting an interest rate ceiling for bank deposits?
It restricts the ability of banks to compete for investors' money.
## Footnote
This can limit the overall amount of money available for lending.
88
What can central banks do to restrict the expansion of the money supply?
Directly restrict lending through directives.
## Footnote
For example, they can limit consumer credit availability or impose restrictions on mortgage lending.
89
Why are inflation expectations important in the economy?
They influence the strength of the domestic currency and the yield on risk-free long-term bonds.
## Footnote
Expectations about inflation can affect investment decisions and economic stability.
90
Who primarily benefits from inflation expectations?
The central bank in its monetary policy management.
## Footnote
However, investors may also benefit if they trust the central bank's forecasts.
91
What are the possible disadvantages of financial intermediaries?
* Additional layer of costs to the investor
* Products may not meet exact requirements
* Inflexibility of products
* Loss of control over investment choice
## Footnote
These disadvantages can affect the overall investment experience for individuals.
92
What are the two main types of government securities?
* Treasury bills (short-term borrowing)
* Government bonds (long-term borrowing)
## Footnote
These securities are used by governments to manage their financing needs.
93
What is the main alternative for governments to raise revenue?
Taxation, including national insurance.
## Footnote
Other methods like asset sales and printing money have limitations and risks.
94
Define oligopolistic industry.
An industry with a small number of competing firms, each aware that its actions will provoke reactions from others.
## Footnote
Oligopolies often lead to strategic interactions among firms.
95
What would happen if the money supply wasn't expanded with increased demand?
Interest rates would rise, dampening economic demand.
## Footnote
This relationship illustrates the balance needed in monetary policy.
96
List the economic objectives that should be maintained.
* Low unemployment
* Low and stable inflation
* Balanced payments
* High and stable economic growth
## Footnote
These objectives are crucial for a healthy and sustainable economy.
