theme 2 and 4 application general Flashcards

Question

examples of bank runs

Answer 1

🏦 1. Northern Rock (UK, 2007) What happened? During the 2007-2008 financial crisis, Northern Rock, a UK mortgage lender, was heavily reliant on short-term borrowing from financial markets. When liquidity in the credit markets dried up, it couldn’t raise funds and turned to the Bank of England for emergency support. News of this led to panic, and thousands of customers queued to withdraw their money, fearing the bank would collapse. Why it matters: First bank run in the UK in over a century. Led to government intervention and nationalisation. Highlighted the dangers of overreliance on wholesale funding and poor risk management. 🇺🇸 2. Silicon Valley Bank (USA, 2023) What happened? SVB served many tech startups and venture capital firms. In 2023, rising interest rates reduced the value of its bond portfolio, creating liquidity issues. When SVB announced a large loss and a share sale, it spooked depositors. Customers withdrew $42 billion in a single day, making it one of the fastest bank runs in modern history. Why it matters: Second-largest bank failure in US history. Triggered regulatory action and sparked fears of contagion across the financial sector. Raised questions about interest rate risk management and deposit insurance limits. 🇬🇷 3. Greek Banks during the Eurozone Crisis (2015) What happened? Amid fears that Greece would leave the Eurozone (the “Grexit”), citizens feared their euro deposits might be converted into a devalued local currency. People rushed to withdraw cash, leading to €30 billion in withdrawals in six months. The government imposed capital controls, including ATM withdrawal limits and bank closures. Why it matters: Shows how political uncertainty and loss of confidence in the financial system can trigger a bank run. Highlighted risks in the sovereign-bank feedback loop.

Answer 2

the concept that individuals have incentives to alter their behaviour when their risk or bad-decision making is borne by others Comprehensive insurance policies decrease the incentive to take care of your possessions Governments promising to bail out loss-making banks can encourage banks to take greater risks. Conditions necessary for moral hazard: There is information asymmetry. Where one party holds more information than another. For example, a firm selling sub-prime loans may know that the people taking out the loan are liable to default. But, the bank purchasing the mortgage bundle has less information and assumes that the mortgage will be good. A contract affects the behaviour of two different agents. In some cases, two parties face different incentives. If you are insured, then you may have less incentive to take care against risks. For example, if a country knows it will receive a bailout from the IMF, then it may feel less incentive to reduce debt. Moral hazard is particularly a problem in the insurance market because when insured, people may be more liable to lose things.

Answer 3

an economic bubble in Japan from 1986 to 1991 in which real estate and stock market prices were greatly inflated.In early 1992, this price bubble burst and the country's economy stagnated.

Answer 4

Stage on the EKC: Post-turning point (declining pollution with rising income) In the 19th century, during industrialisation, the UK saw high levels of air and water pollution. But as GDP per capita increased, the country invested in clean energy, regulation (e.g. Clean Air Acts), and green technology. CO₂ emissions have declined steadily since the 1970s, even while the economy continued growing. 🧪 2. China 🇨🇳 Stage on the EKC: Around the turning point Rapid industrialisation since the 1980s led to serious environmental damage (e.g. smog, water contamination, deforestation). Recently, China has started investing heavily in renewable energy and enacting strict pollution controls. While pollution is still high, growth in GDP is now being accompanied by environmental improvements in some cities and sectors. 3. Norway 🇳🇴 Stage on the EKC: Post-turning point (advanced) Very high GDP per capita and low levels of pollution. Invests heavily in renewables (hydropower, EVs) and ranks highly in global environmental indexes. Government policies are strict and proactive, even though the country is a major oil exporter. ✅ Strong evidence for EKC: Extremely wealthy but very clean environment.

Answer 5

🇺🇸 1. United States Stage: After the turning point — but inequality rising again In the early 20th century, as the US industrialised, inequality rose. From the 1930s to 1970s, redistribution, unionisation, and education reduced inequality (supporting the Kuznets Curve). But from the 1980s onwards, inequality rose again due to globalisation, tech changes, and weakened labour protections. ⚠️ Evaluation: The original Kuznets Curve doesn’t fully explain modern US inequality — suggests a potential “reversed Kuznets” trend. 🇧🇷 2. Brazil Stage: Past the turning point Historically, Brazil had extremely high inequality (land ownership, race, urban–rural divide). But between 2001–2015, inequality fell significantly due to: Social programmes (e.g., Bolsa Família) Education investment Minimum wage increases Growth combined with redistribution helped Brazil move down the Kuznets Curve. ✅ Supports the Kuznets Curve. 🇨🇳 3. China Stage: On the upward slope — rising inequality Since economic reforms began in the 1980s, China’s GDP grew fast, but inequality also surged, especially between rural and urban areas. Gini coefficient rose from ~0.3 in the 1980s to over 0.45 today. Policies like Hukou (household registration) and regional investment disparities worsened inequality. 🔺 Supports early part of Kuznets Curve, but China hasn’t hit the turning point yet. 🇰🇷 4. South Korea Stage: Post-turning point — relatively equal Industrialised quickly from the 1960s, experienced rising inequality. From the 1980s, strong public education, land reform, and export-led growth helped reduce inequality. Today, income inequality is moderate by OECD standards, though youth inequality is growing. 🇿🇦 5. South Africa Stage: Exception — persistent inequality Despite middle-income status and growth post-Apartheid, South Africa remains one of the most unequal countries in the world (Gini ~0.63). Historical racial inequality, weak labour markets, and poor education access continue to hold inequality high. ❌ Doesn’t follow Kuznets Curve — inequality remains high even with growth.

Answer 6

14.3 million people/1 in 5 people

Answer 7

Key Protectionist Policies: Rice Import Restrictions (Since 2015): Ban/heavy tariffs on rice imports to boost local agriculture and food security. Result: Local rice industry grew, but rice prices rose; smuggling increased. High Tariffs on Imported Cars & Electronics: Tariffs often 50%+ to protect local assembly plants and manufacturing. Result: Limited success in developing local industry; consumers face high prices and fewer choices. “Made in Nigeria” Policy (Since 2014): Tariffs and incentives to promote domestic manufacturing (textiles, cement, consumer goods). Result: Mixed success; challenges with enforcement and smuggling remain.

Answer 8

Key Protectionist Policies: Post-Brexit Tariffs and Customs Checks (Since 2020): New tariffs and border controls on EU imports to protect domestic industries. Result: Trade frictions, delays, higher costs; some benefits for UK producers. Steel Import Tariffs (2019–2021): 25% tariff on steel from countries like China to shield UK steel industry. Result: Temporary support for steel firms, risk of retaliation, and increased costs for UK manufacturers.

Answer 9

Key Characteristics: Increased Interdependence: US and China are major trading partners. Expansion of Trade: Bilateral trade reached approximately **$700 billion** annually before tariffs. Global Supply Chains: Both countries are integral to global production networks. Impact of the Trade War: **Disruption of Supply Chains**: Tariffs led to shifts in global supply chains. Economic Slowdown: Global trade flows contracted by **5.5% to 8.5%** due to the trade war. Investment Diversion: Investors sought diversification away from US assets.

Answer 10

Absolute Advantage: China: Lower production costs in electronics and textiles. US: Advanced technology and high-quality agricultural products. Comparative Advantage: China: Specialises in manufacturing goods with lower opportunity costs. US: Specialises in high-value-added sectors like technology and agriculture. Impact of the Trade War: Distortion of Comparative Advantage: Tariffs hindered the efficient allocation of resources. Trade Diversion: Shifted trade flows to other countries, affecting global efficiency.

Answer 11

Pre-Trade War: US Imports from China: Approximately $335 billion annually. China Imports from US: Approximately $100 billion annually. Post-Tariff Adjustments: US Imports from China: Shifted to other countries. China Imports from US: Declined due to retaliatory tariffs. Impact: Trade Diversion: Other countries increased exports to the US and China. Global Trade Flows: Overall trade volumes contracted due to tariff-induced disruptions.

Answer 12

Types of Restrictions: Tariffs: US imposed tariffs up to 145% on Chinese goods. Quotas: Not explicitly mentioned but implied through trade imbalances. Subsidies: Not directly addressed in the context of the trade war. Impact: Consumers: Higher prices for goods imported from China. Producers: Disrupted supply chains and increased production costs. Governments: Faced challenges in balancing trade deficits and economic growth.

Answer 13

🌍 Global Financial Crisis 2008 Causes Chain Excessive risk-taking by banks and financial institutions → led to high exposure to toxic mortgage-backed securities → Collapse of US housing bubble → sharp fall in asset prices and losses on bank balance sheets → Major banks like Lehman Brothers failed → caused a global credit crunch and loss of confidence → Worldwide recession triggered, with global GDP contracting by about 0.1% in 2009 🇬🇧 Impact of GFC on UK Economy Chain UK banks suffered heavy losses due to exposure to bad loans → Northern Rock was nationalised in 2008, Royal Bank of Scotland (RBS) needed a £45 billion government bailout → Credit crunch caused lending to households and firms to dry up → UK GDP contracted by 4.3% in 2009 → Unemployment rose from 5.2% in 2008 to 7.9% in 2011 → government revenues fell sharply while welfare spending increased → Budget deficit ballooned from 2.5% of GDP in 2007 to 10.1% in 2009 → national debt rose above 80% of GDP by 2012 💷 UK Government’s Fiscal Response Chain To stimulate the economy, the UK government launched a fiscal stimulus package worth £20 billion in late 2008 → increased public spending and cut VAT temporarily from 17.5% to 15% in 2009 → Bank recapitalisation programs injected £37 billion into RBS and Lloyds → aimed to restore confidence in the banking system → Quantitative easing (QE) was introduced by the Bank of England, increasing from £75 billion in 2009 to £375 billion by 2012 → lowered long-term interest rates and encouraged lending → Despite stimulus, the UK entered a period of austerity from 2010 to reduce deficit → public spending cuts and tax rises 📉 Long-term UK Economic Effects Chain Prolonged austerity contributed to slow economic recovery → UK GDP growth averaged about 1.5% annually from 2010 to 2015, below pre-crisis levels → Public services faced funding pressure → welfare reforms aimed to reduce dependency but faced criticism for social impact → National debt increased to around 85% of GDP by 2015 → though the deficit was reduced to about 4.3% by 2015, debt servicing remained a concern → Financial regulations were tightened, e.g., creation of the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in 2013 to prevent future crises

Answer 14

The Bank of England has cut interest rates from 4.5% to 4.25%

Answer 15

£47.7 billion (2023) — high due to stable business environment

Answer 16

1. 0.946, placing it in the "very high" human development tier. 2. 0.970

Answer 17

UK - 0.36 Nigeria - 0.35 BUT widespread poverty, 40% in absolute poverty

Answer 18

Naira/USD = 1,400–1,600 (managed float, massive depreciation in 2023-24 due to reforms) Naira depreciated significantly due to removal of multiple exchange rates and FX restrictions

Answer 19

Approx. 4.2% (but misleading due to informal sector; youth unemployment very high)

Answer 20

24.48 driven by subsidy removal and food price shocks

Answer 21

2.9% projected for 2024

Answer 22

CBN rate = 24.75% (as of May 2024)

Answer 23

In 2024, Nigeria attracted $17 billion in Foreign Direct Investment (FDI)

Answer 24

875bn pounds over last 12 yrs

Answer 25

🇬🇧 UK Terms of Trade Generally stable or improving in recent years. UK mainly exports high-value services (financial, legal, education) and manufactured goods. Imports energy, food, and consumer goods. 🔹 Recent ToT: Around 100–105 (slightly favourable) UK benefits from strong services exports and stable export prices. 🇳🇬 Nigeria Terms of Trade Nigeria’s exports are heavily dependent on crude oil (≈80-90%). ToT is highly volatile due to fluctuations in global oil prices. 🔻 When oil prices fall: ToT worsens significantly. Nigeria has to export more oil to afford same volume of imports. 🔺 When oil prices rise: ToT improves, but can cause Dutch disease and overreliance on oil. 🔹 2023-24 trend: ToT weakened in early 2023 due to currency devaluation and rising import prices. Slight rebound in 2024 with oil price stabilisation (~$80/barrel).

Answer 26

1. Deep cuts to public sector spending (welfare, local councils, education). - Pay freezes & job cuts in public services. - Rise in VAT (from 17.5% to 20%) in 2011. - Freeze on working-age benefits. 2. Public sector job losses (especially 2010–2013). - Unemployment peaked at 8.5% in late 2011. - Gradually fell as private sector recovered, but youth unemployment remained elevated. 3. Hit low-income households hardest (benefit caps, UC changes). - Rise in food bank usage and homelessness. - Relative poverty increased, especially among children. 4. Budget deficit reduced from ~10% of GDP (2010) to ~2% (2019). - But debt-to-GDP ratio rose from ~60% (2009) to over 80%+, due to weak growth. - Critics argue it delayed recovery and reduced tax revenue. 5. Lower productivity growth and weak investment. - Arguably harmed potential output and worsened regional inequalities. - Recovery was slower than other G7 nations.

Answer 27

Since 2005, the UK has been a net importer of oil. Therefore, lower oil prices reduce import costs and improve the current account.

Answer 28

1. Lower fuel & energy prices ➡️ reduced cost-push inflation - CPI inflation fell below 1% in 2015–2016 ✅ Helped maintain price stability 2. Lower petrol, heating, and transport costs ➡️ Increased real disposable income ➡️ Higher consumer spending ➡️ Boost to AD = Mild positive demand-side shock 3. Lower input and transport costs for energy-intensive industries - Boosted profit margins ➡️ Encouraged investment and employment in some sectors (But hurt oil-related sectors in Aberdeen/Scotland) 4. Job losses in oil and gas sector (e.g. North Sea firms) BUT - Overall unemployment fell due to consumer spending stimulus ➡️ Balanced impact, depending on region 5. Reduced North Sea oil tax revenues BUT increased VAT from higher spending ➡️ Mixed impact, but manageable due to low borrowing costs 6. Allowed the BoE to keep rates low without risking inflation Gave space for looser monetary policy to support recovery

Answer 29

(Final value ÷ Initial value) X 100

Answer 30

refers to a person's earnings compared to a specific reference group or a previous point in time. It's about how an individual's income stacks up against others in their social or professional sphere, or how their income compares to their own past earnings. Reference Group: Relative income considers your earnings in relation to the average income of a group you identify with or compare yourself to, such as colleagues, peers, or a specific demographic. Social Comparison: This comparison influences how people perceive their own financial status and can affect their happiness and well-being

Answer 31

The UK's fiscal deficit for the 2024-25 financial year was £151.9 billion

Answer 32

2.8 trillion British pounds in 2024/25, compared with 1.8 trillion pounds in 2019/20.

Answer 33

Depends on whether tax cuts are self-financing. If tax cuts raise productivity, employment and wages → more people may be pulled into higher tax brackets via fiscal drag ⬇ This could offset revenue losses, especially if tax cuts stimulate high growth. This occurred in the early 1980s in the US post-Reagan tax cuts, though the evidence is debated. ⬇ If productivity rises, the supply-side benefits may outweigh the short-run costs.

Answer 34

✅ Benefits of QE 📉 1. Lowered interest rates and borrowing costs QE increased demand for government and corporate bonds ➡️ bond prices rose ➡️ yields (interest rates) fell. Cheaper loans for households and businesses ➡️ boosted consumption and investment. Example: Bank Rate was close to 0.1% during COVID and 0.5% after the GFC — QE reinforced this effect. 💷 2. Stimulated economic recovery QE injected liquidity into the financial system ➡️ supported aggregate demand. Helped to prevent deflation and depression-like outcomes. GFC: Boosted recovery from the banking collapse. COVID: Offset the impact of lockdowns and protected jobs via fiscal coordination (e.g., furlough). 📊 3. Supported financial markets Provided reassurance to investors and banks, restoring confidence. Stabilised stock markets and reduced volatility. COVID: Prevented collapse of gilt markets in March 2020 with £200bn QE injection. GFC: Supported banks indirectly via asset purchases and restored interbank lending. 🏦 4. Enabled government borrowing QE helped fund massive public spending with low yields on gilts. COVID: UK ran large fiscal deficits (e.g., furlough scheme) without bond market panic. ❌ Drawbacks of QE 📈 1. Asset price inflation and inequality QE raised prices of financial assets ➡️ disproportionately benefitted wealthier households. Widened the wealth gap. GFC: House prices and stock markets rebounded quickly. COVID: Same pattern; house prices surged despite economic uncertainty. 💸 2. Inflationary pressure QE increases money supply ➡️ risk of future inflation. COVID: Inflation lagged at first but surged in 2022 (although driven more by supply shocks). GFC: Little inflation due to weak demand, but fears persisted. ⚖️ 3. Currency depreciation QE can weaken the exchange rate ➡️ increased cost of imports and worsened trade balance. COVID & GFC: Sterling fell significantly, making the UK more vulnerable to imported inflation. 🔁 4. Diminishing returns and dependency Repeated QE made markets reliant on central bank support ➡️ harder to reverse. Reduced central banks’ room to act in future crises. GFC to COVID: Successive rounds of QE meant over £895bn of assets on Bank of England’s balance sheet by 2021.

Answer 35

Equatorial Guinea: Despite being one of the richest countries in Africa due to its oil production, Equatorial Guinea has significant income inequality and low HDI scores, ranking 144th in the UN's 2014 HDI. Saudi Arabia: Oil-rich Gulf states like Saudi Arabia may have high GNI but may not necessarily have high HDI scores due to inequalities within the country, such as lower access to healthcare and education for certain segments of the population. Russia: While Russia has a high GNI per capita, it also has high levels of inequality, which may impact the overall HDI score. China: While China has a high GNI and is experiencing rapid economic growth, there are significant regional disparities, with some areas having lower HDI scores than others.

Answer 36

A large multinational corporation (MNC) producing consumer goods (e.g. Dove, Lipton, Surf Excel) Dual-headquartered in the UK and Netherlands, operates in 190+ countries Major operations in India through its subsidiary Hindustan Unilever Limited (HUL)

Answer 37

Economies of scale → lower average costs → cheaper products for consumers Increased consumer choice and brand competition in markets like soap, tea Employment creation → HUL employs over 20,000 directly Local supply chains developed, boosting small businesses and farmers

Answer 38

FDI inflows boost the capital account Investment in infrastructure (factories, logistics) Training/upskilling workforce improves human capital Support for women entrepreneurs through the “Shakti programme” – over 136,000 rural women empowered

Answer 39

Environmental concerns – e.g. mercury pollution scandal in Kodaikanal Market dominance may lead to monopoly power Profits repatriated to UK HQ → limits reinvestment Focus on urban markets → may neglect poorer rural needs

Answer 40

Still contributes to GDP and employment (brands made in UK) Major investor in sustainability and green tech Contributes to exports (e.g. food, hygiene products) Concerns over tax avoidance or profit shifting Some jobs offshored or automated, reducing long-term employment

Answer 41

Competitive pressure on other firms in FMCG industry R&D investment supports product innovation Scale of operations supports supplier industries In 2022, moved legal HQ to the Netherlands, sparking concerns about corporate loyalty Price-setting power in supermarkets (e.g. Marmite price row with Tesco)

Answer 42

The strength of local regulation, ability to enforce tax and labour laws Whether profits are reinvested locally or repatriated abroad The degree of market competition and externalities created Effectiveness of CSR (e.g. Unilever’s sustainability strategy)

Answer 43

Brazil; South Korea; Chile; South Africa; Turkey; New Zealand

theme 2 and 4 application general Flashcards

(69 cards)