Top 2 Flashcards
1
Q
What are macroeconomic objectives?
A
Macroeconomic objectives are goals that concern the economy as a whole, focusing on economic aggregates.
2
Q
How do political beliefs influence economic objectives?
A
- Political beliefs shape the methods governments use to achieve economic objectives AND;
- Determine the importance given to each goal.
3
Q
How do macroeconomic objectives differ from microeconomic objectives?
A
MACROeconomic objectives focus on the economy as a whole;
While MICROeconomic objectives deal with individual firms or consumers.
4
Q
Definition of inflation
A
A sustained increase in the general level of prices of goods and services.
I.e., ‘Too much money chasing too few goods’
5
Q
Meaning of disinflation
A
a DECREASE in the rate of inflation.
i.e., Prices are still rising, but less quickly; From +5% to +3% is a 2% disinflation.
6
Q
What is meant by deflation
A
A general fall in the price of goods and services.
In other words, the inflation rate is below 0% - a NEGATIVE inflation rate, such as -2%.
7
Q
What are the key macroeconomic objectives
A
- Price stability
- Low unemployment
- Balance of payments equilibrium
- Satisfactory economic growth
8
Q
What does price stability as a macroeconomic objective involve?
A
Price stability involves maintaining a low and controlled rate of inflation.
While zero inflation is not necessarily desirable, moderate inflation can stimulate investment, which benefits the economy.
9
Q
How does the objective of low unemployment relate to economic expansion?
A
Low unemployment involves:
- EXPANDING the economy;
- which INCREASES demand for labor, land, and capital;
- thereby REDUCING unemployment levels.
10
Q
What is meant by balance of payments equilibrium?
A
Balance of payments equilibrium occurs when expenditure on imports and investment income going abroad is balanced with income from exports and overseas investments.
It is closely linked to maintaining a stable exchange rate.
11
Q
How is satisfactory economic growth defined as a macroeconomic objective?
A
Satisfactory economic growth means that the economy’s output is increasing in real terms over time, leading to higher standards of living.
12
Q
Why is maintaining a stable exchange rate important for a balance of payments equilibrium?
A
A stable exchange rate prevents the currency from becoming too expensive, which would discourage exports, or too cheap, which could increase inflation.
13
Q
Why is it challenging to achieve all key macroeconomic objectives simultaneously?
A
Achieving all key macroeconomic objectives simultaneously is difficult because actions taken to improve one objective can negatively impact others.
For example, reducing unemployment through expansionary measures can lead to higher inflation and a worsening balance of payments.
14
Q
What are the potential consequences of using expansionary measures to reduce unemployment?
A
Using expansionary measures such as lower interest rates and taxes to reduce unemployment can:
- Increase demand for goods and services;
- leading to higher inflation AND a negative impact on the balance of payments.
15
Q
How are the four macroeconomic objectives grouped into pairs?
A
The objectives are grouped into two pairs:
- Policies that reduce unemployment tend to also boost economic growth.
- Measures to reduce inflation tend to improve the balance of payments.
16
Q
What trade-off do governments OFTEN face when trying to manage price stability and unemployment?
A
Governments often trade off between price stability and unemployment, accepting a low rate of inflation to avoid causing high unemployment and pushing the economy into recession.
17
Q
Meaning of recession
A
A significant decline in economic activity over a sustained period.
Technically, it is 2 CONSECUTIVE quarters of NEGATIVE GDP growth
18
Q
What is Gross Domestic Product?
A
GDP is a measurement of a country’s overall economic activity.
Technically, it is the monetary value of all goods and services produced within the country in a given period.
19
Q
What are the four main phases that economies typically go through?
(In chronological order)
A
- Recovery and expansion
- Boom
- Contraction OR Slowdown
- Recession
20
Q
How is economic activity measured in an economy?
A
Economic activity is measured by the rise and fall in GDP
21
Q
What does it mean when an economy is in the recovery or expansion phase?
A
The economy is in recovery or expansion when GDP is rising.
22
Q
When is an economy considered to be booming?
A
An economy is considered to be booming when GDP is at its highest level.
23
Q
What indicates that an economy is contracting or slowing down?
A
The economy is contracting or slowing down when GDP in ONE QUARTER falls compared to the previous quarter.
24
Q
What signals that an economy is in recession?
A
An economy is in recession when there are two successive quarters of declining GDP.
25
What characterises each phase of the economic cycle?
Each phase of the economic cycle is characterized by fluctuating patterns of economic activity.
26
What happens during the recovery and expansion phase of the economic cycle?
1. Interest rates, inflation, and unemployment are low.
2. Increased consumer spending raises demand for goods and services, pushing prices up and improving share prices as businesses flourish.
27
What does the Bank of England do during the boom phase to prevent the economy from overheating?
The Bank of England may raise interest rates to control consumer spending and dampen inflation.
28
What occurs during the contraction or slowdown phase of the economic cycle?
1. As interest rates INCREASE, consumer spending and demand for goods and services DECREASE...
...leading to:
1. Decreased profits and share prices;
2. Higher unemployment
3. Slower inflation.
29
What happens during a recession, and how might the Bank of England respond?
During a recession, economic activity declines significantly.
The Bank of England may DECREASE interest rates to STIMULATE DEMAND and help the economy recover.
30
How was economic policy approached in the UK from the 1960s to the 1990s?
The approach was known as 'stop-go,' with governments alternating between accelerating and decelerating the economy, leading to cycles of fast growth and high inflation followed by slowdowns with high unemployment.
31
What is the current approach to economic policy in the UK and Europe since the 1990s?
The focus has been on:
1. Maintaining low and steady inflation to provide economic stability
2. Promote sustained growth, aiming to align aggregate demand with the economy's productive capacity.
32
What is the UK's official target for inflation?
The target is an average annual inflation rate of 2%, WITH a permissible deviation of ±1%.
33
What is the main method used by the UK to control inflation?
Manipulating interest rates
34
What are the two major types of economic policy used by governments to achieve long-term objectives?
1. Monetary policy
2. Fiscal policy
35
How do fiscal AND monetary policies relate to each other?
They are closely linked and often used together to influence:
1. Aggregate demand
2. Output
3. Unemployment
4. Prices
36
What is a measure of the change in price of a ‘basket’ of consumer goods and services over time, and how is it reviewed?
Consumer Price Index (CPI)
37
What is monetary policy?
Measures taken to control the supply of money in the economy AND manage inflation BY raising or lowering interest rates.
38
What is the common belief among monetary economists regarding the cause of inflation?
Monetary economists commonly believe that inflation is caused by an increase in the money supply.
39
How is the growth in the money supply primarily achieved according to monetary economists?
The growth in the money supply is primarily achieved through an increase in the amount of credit created by banks.
40
What is a common method used to control the growth of the money supply and thus manage inflation?
A common method is manipulating interest rates, which influences the demand for credit by customers.
41
Why is controlling the amount of credit created by banks important for managing inflation?
Controlling the amount of credit is important because it helps regulate the money supply, which in turn affects inflation rates.
42
Besides manipulating interest rates, what are other methods used to control the money supply?
Other methods include imposing restrictions on the amount that banks can lend and requiring borrowers to provide a minimum cash deposit when making a purchase.
43
What is one example of a restriction that can be imposed on banks to control the money supply?
One example is imposing limits on the amount that banks can lend.
44
How can requiring a minimum cash deposit from borrowers help manage the money supply?
Requiring a minimum cash deposit reduces the amount of credit available for borrowing, thereby controlling the growth of the money supply.
45
What is the current primary method used in the UK to control the money supply?
The primary method used in the UK is the manipulation of interest rates.
46
Who decides on the official Bank rate in the UK?
The Monetary Policy Committee (MPC)
47
How does the Bank rate affect interest rates for borrowers and lenders?
The Bank rate determines all other interest rates charged to borrowers and paid to lenders.
48
Can the Treasury influence monetary policy in the UK?
(Explain)
Yes.
Treasury can give instructions to the Bank of England regarding monetary policy in "extreme economic circumstances."
Otherwise, the Bank acts independently.
49
What is the Bank Rate?
The Bank Rate is the rate at which the Bank of England lends to other financial institutions.
50
How does the Bank Rate impact financial institutions?
The Bank Rate affects the cost of borrowing for financial institutions, which in turn influences interest rates for borrowers and lenders in the wider economy.
51
What is an inflation target?
An inflation target is the level of inflation deemed appropriate to keep the national economy functioning efficiently.
52
What is the current inflation target in the UK?
The current inflation target in the UK is 2%, as measured by CPI, with a MAXIMUM divergence of 1% either way.
53
Who is responsible for achieving the inflation target in the UK?
The Bank of England
54
How does the inflation target influence the Bank Rate?
Current and predicted future levels of inflation are key considerations in setting the Bank Rate.
55
Who sets interest rates in the UK?
Interest rates are set by the Bank of England’s Monetary Policy Committee (MPC).
56
How often does the MPC meet to set interest rates?
8 times a year, over 3 days
57
What tool does the MPC use to help with its projections?
The MPC uses a model of the economy to organize thinking on how the economy works and how different developments might affect future inflation.
58
How does the Bank of England keep the public informed about economic conditions and policy decisions?
Every quarter, the Bank of England publishes its Monetary Policy Report, which analyzes the UK economy and factors influencing policy decisions.
59
How do banks typically respond to changes in the Bank Rate?
Banks:
Adjust their lending AND deposit rates by a similar amount to maintain their profit margins.
60
Why are banks' base rates variable?
Because they follow the Bank of England's rate, which is adjusted as part of monetary policy
61
How did the Bank Rate change from 2009 to 2016?
0.5% from 2009 to 2016, and was reduced to 0.25% in August 2016
62
What was the Bank Rate in August 2023, and why was it increased?
The Bank Rate was increased to 5.25% in August 2023 to address HIGH INFLATION during the COST OF LIVING CRISIS
63
What is a major disadvantage of variable interest rates for loans and mortgages?
1. Difficult for borrowers to budget for future costs
2. Sudden rate increases can lead to repayment difficulties or even foreclosure.
64
How have fixed-rate mortgages evolved in recent years?
Fixed-rate mortgages are now more common.
Although many in the UK are fixed only for a short initial period, with rates reverting to variable thereafter.
65
How could longer-term fixed rates benefit the UK housing market?
They could:
1. Help stabilise the housing market by reducing volatility
2. Providing more predictable repayment costs for borrowers.
66
What is a disadvantage of fixed-rate mortgages if variable interest rates fall?
Borrowers may end up paying more if they are locked into a higher fixed rate while variable rates drop.
67
Why might there be a penalty for early repayment of a fixed-rate mortgage?
The penalty protects the lender from financial loss due to the funds being raised at fixed rates for the medium/long term.
Without penalties, early repayment would result in less interest earned than anticipated.
68
What additional fee might borrowers face with fixed-rate mortgages?
Borrowers may face an arrangement fee for securing funds at the fixed rate.
69
How does the government raise funds to pay for public services?
The government raises funds through direct and indirect taxes from individuals and firms in the private sector.
70
What are the three general outcomes of fiscal policy changes?
The three general outcomes are:
1. Expansionary Outcome: Increased government spending or reduced taxes stimulate economic activity.
2. Contractionary Outcome: Decreased government spending or increased taxes slow down economic activity.
3. Balanced Outcome: Adjustments in spending and taxes aim to maintain economic stability.
71
What is 'Fiscal policy'?
The adjustment levels of taxation and public spending in a way that is intended to achieve the government's macroeconomic objectives.
72
What does 'PSNCR' stand for?
Public Sector Net Cash Requirement
73
What does the Public Sector Net Cash Requirement (PSNCR) measure?
Measures the short-term net financing requirement of the public sector.
74
Why does the government need to use PSNCR?
To determine the amount it needs to borrow to cover a deficit.
75
What does a government with a deficit need to do to finance it?
A government with a deficit needs to BORROW to finance it
76
What is a balanced budget?
Effect on economy is neutral – amount taken in tax is put back into public spending
77
What is a budget surplus?
Amount taken in taxation is greater than amount put back in to public spending
78
What is a budget deficit?
Public spending is greater than amount taken in taxation
79
What does the Chancellor of the Exchequer do in the Budget statement?
The Chancellor of the Exchequer outlines the state of the economy and proposes changes to taxation.
80
What happens after the Chancellor's Budget statement?
The House of Commons debates the Budget and scrutinizes the Finance Bill, which enacts the proposed changes.
81
Who provides economic forecasts included in the Budget?
The Office for Budget Responsibility (OBR) provides the economic forecasts.
82
How does monetary policy impact the economy?
Via changes in the level of interest rates
83
How does fiscal policy affect the economy?
Fiscal policy can:
1. Affect the level of economic activity broadly (Macroeconomic effect)
2. Target specific areas (Microeconomic effect), via incentives or government grans
84
What is an example of how fiscal policy can target specific areas of the economy?
1. Tax incentives: For example, tax incentives to manufacturing industries to boost employment
2. Government grants: For example, provide grants to firms relocating to specific areas to develop local economies.
85
How does increased general taxation affect the market for financial services and products?
Reduces the amount of money available for:
1. investment, or;
2. to fund loan repayments.
86
How can tightening the taxation regime on specific products or activities impact investors?
Tightening the taxation regime can make those products or activities less attractive to investors.
For example, the introduction of a stamp duty land tax supplement in April 2016 aimed to address the issue of first-time buyers being priced out by buy-to-let landlords.
87
When did the UK officially leave the European Union (EU) and what was the transition period?
The UK officially left the EU on January 31, 2020.
The transition period lasted until December 31, 2020.
88
What does the Retained EU Law Act 2023 enable regarding EU laws?
The Retained EU Law Act 2023, allows for:
1. The amendment and replacement of retained EU laws, and;
2. Grants courts greater freedom to depart from retained EU case law.
89
How was the Financial Services and Markets Act 2023 affected UK financial regulation?
1. Includes provisions for repealing retained EU laws, and grants the FCA greater powers to develop regulations.
2. New secondary objective for the FCA to promote the international competitiveness and growth of the UK economy
90
What are the key characteristics of EU Regulations?
1. General application
2. Are binding in their entirety, both in terms of goals and methods to achieve them
3. Are directly applicable in all member states
91
How do EU directives differ from regulations?
1. Binding on member states with respect to the results they must achieve, BUT each member state has discretion in determining how to achieve this results.
2. Directives MUST be implemented within a specific timescale, BUT the methods of implementation are left to the individual member states.
92
Are regulations or directives directly applicable in member states?
1. Regulations are DIRECTLY applicable in all member states. They become law without needing further national legislation.
2. Directives, however, require member states to achieve specific outcomes BUT allow them to decide HOW to achieve these outcomes within the set timeframe.
93
What happens when the EU changes a regulation OR introduce new regulation post-Brexit?
The UK evaluates whether to:
1. Adopt the new EU regulation
OR
2. Develop an alternative approach
OR
3. Amend existing legislation that was onshore from the EU before Brexit
94
What is the purpose of the EU Mortgage Credit Directive (MCD)?
The aims are to:
1. Harmonise the regulation of the mortgage credit market across the EU
AND
2. Promote competition
95
How does the 'EU Deposit Guarantee Schemes Directive' influence the 'Financial Services Compensation Scheme' (FSCS) in the UK?
The EU Deposit Guarantee Schemes Directive requires the FSCS's deposit protection limits to be revalued every five years to ensure they remain aligned with the €100,000 protection level provided by the EU-wide scheme.
96
What was the main reason for the establishment of the European System of Financial Supervision (ESFS)?
The ESFS was set up in response to the financial crisis of 2007-09 to ensure consistent financial supervision across EU member states.
97
How is the European System of Financial Supervision (ESFS) structured?
The ESFS is:
1. Decentralised;
And it operates through:
1. 3 European Supervisory Authorities (ESAs)
2. Network of national regulators
98
What are the 3 European Supervisory Authorities (ESAs) within the ESFS?
The 3 ESAs are:
1. European Securities and Markets Authority (ESMA)
2. European Banking Authority (EBA)
3. European Insurance and Occupational Pensions Authority (EIOPA)
99
What are the main aims of the European Supervisory Authorities (ESAs)?
The main aims of the ESAs include:
1. Creating a single EU rule book by developing draft technical standards for adoption by the European Commission.
2. Issuing guidance and recommendations that national supervisors and firms must comply with.
3. Investigating national supervisory authorities that fail to apply or breach EU law.
4. Providing EU-wide coordination in crises and making decisions that are binding on national supervisors and firms if an emergency is declared.
5. Mediating in disputes between national supervisory authorities and making binding decisions to ensure compliance with EU law.
6. Conducting reviews of national supervisory authorities to improve consistency of supervision across the EU.
7. Considering consumer protection issues.
100
What powers do the European Supervisory Authorities (ESAs) have to enforce EU regulations?
The ESAs have the power to:
1. Propose new rules and develop draft technical standards.
2. Issue guidance and recommendations that national supervisors and firms must follow.
3. Investigate and address failures or breaches of EU law by national supervisory authorities.
4. Coordinate responses during financial crises and make binding decisions if an emergency is declared.
5. Mediate disputes between national supervisors and enforce compliance with EU law.
6. Conduct reviews to ensure consistency in supervision.
7. Address consumer protection issues.
101
What is the role of the European Systematic Risk Board (ESRB)?
The ESRB is responsible for preventing and mitigating SYSTEMIC FINANCIAL RISK across the EU.
Meaning, Its role is to identify and address risks that could affect the stability of the financial system as a whole.
102
What are the key responsibilities of the ESRB?
The key responsibilities of the ESRB include:
1. Identifying and prioritising risks:
The ESRB monitors and assesses potential systemic risks to the financial stability of the EU.
2. Issuing warnings and recommendations:
The ESRB issues warnings about potential threats to financial stability and makes recommendations to address these risks. It also monitors the follow-up to these recommendations.
3. Co-operating with other members of the ESFS:
The ESRB works with other supervisory authorities within the European System of Financial Supervision (ESFS) to ensure a coordinated approach to financial stability.
4. Co-ordinating action with other international financial organisations:
The ESRB collaborates with international bodies such as the International Monetary Fund (IMF) to address global financial stability issues.
103
What specific supervisory responsibility does ESMA have?
ESMA has direct supervisory responsibility for credit reference agencies.
This includes overseeing their activities to ensure they operate in compliance with EU regulations and contribute to the stability and transparency of financial markets.
104
How has Brexit affected the UK's participation in the ESFS?
The UK’s regulators, such as the PRA and FCA, are no longer part of the ESFS.
Meaning they are not directly involved in its decision-making.
105
Do ESAs still have jurisdiction over UK financial institutions post-Brexit?
(Explain)
Yes:
ESAs have jurisdiction over UK institutions serving clients in the EU
106
Why is the ESFS still relevant to the UK’s financial sector post-Brexit?
UK institutions must comply with ESAs’ regulations when operating in the EU, making the ESFS relevant for cross-border operations.
107
How does Brexit impact regulatory oversight for UK financial institutions in the EU?
UK institutions must follow both UK regulations and ESAs’ rules when operating in the EU, adding regulatory complexity
108
What role do UK financial regulators play in relation to the ESFS post-Brexit?
UK regulators focus on domestic regulation BUT must consider ESFS rules due to their impact on cross-border operations with the EU.
109
What is the Single Supervisory Mechanism (SSM)?
The SSM is a system where the European Central Bank (ECB) supervises and monitors banks across the EU.
110
How does the SSM work?
The ECB oversees banking supervision with support from national regulators, holding the final say on supervisory decisions
111
What are Acts of Parliament in UK financial regulation?
Acts of Parliament set the:
1. Legal framework for financial regulation, detailing what is permissible and establishing regulatory authority.
112
What is the role of the PRA and FCA?
PRA: Ensures financial stability and soundness of banks and insurers
FCA: Regulates financial markets and consumer protection
113
How do financial institutions ensure compliance with regulations?
Through internal compliance departments that:
1. Create policies
2. Conduct audits
3. Train staff to meet regulatory standards
114
What role do arbitration schemes like the Financial Ombudsman Service play?
They resolve consumer complaints against financial institutions impartially, providing a fair resolution without legal action.
115
How does the PRA contribute to financial system stability?
By overseeing the prudential health of major financial institutions, b ensuring they:
1. Manage risks, and;
2. Maintain adequate capital
116
What are the functions of the FCA?
The FCA regulates firms and markets, ensuring:
1. Fair practices
2. Consumer protection
3. Competition
117
How do statutory instruments support Acts of Parliament?
They provide detailed regulations and procedures based on the broad principles set out in Acts of Parliament.
118
What are the responsibilities of internal compliance departments?
They:
1. Monitor regulatory adherence
2. Conduct audits
3. Implement risk management
119
How does the Financial Ombudsman Service resolve disputes?
It investigate consumer complaints against financial institutions
AND
Provides impartial resolutions
120
What is the first level of regulatory oversight in the UK?
Acts of Parliament.
For example:
- Financial Services and Markets Act 2000
- Financial Services and Markets Act 2023
- Onshore EU legislation
121
What role do regulatory bodies play in the second level of regulatory oversight?
The PRA and FCA:
1. Monitor compliance with regulations
2. Issue detailed rules and requirements
122
What constitutes the third level of regulatory oversight?
Involves the policies and practices of financial institutions themselves, such as:
1. Internal procedures
2. Compliance measures.
123
What is the fourth level of regulatory oversight in the UK?
Arbitration schemes.
For example, the Financial Ombudsman Service handles consumer complaints and disputes with financial institutions
124
What are the four tiers of regulatory oversight in the UK?
First Level - Acts of Parliament, including onshored EU legislation
Second Level - Regulatory bodies (FCA/PRA)
Third Level - Policies/Procedures of the financial institution itself
Fourth Level - Arbitration schemes (Financial Ombudsman Scheme)
125
What is meant by a 'macroeconomic objective'?
An objective impacting the economy as a whole.
126
What are the four key macroeconomic objectives that UK governments generally seek to achieve?
1. Price stability
2. Low unemployment
3. Balance of payments equilibrium
4. Satisfactory economic growth
127
What is a potential negative consequence of expanding economic growth to reduce unemployment?
Increased inflation.
128
All governments aim to achieve zero inflation. True or false?
False.
Some government believe that a reasonable amount of inflation is good for the economy.
Hence, the UK targets a min. 1% to max 3% inflation rate.
129
What is the UK government's inflation target AND how is it measured?
The UK's inflation target is 2%, with a maximum 1% deviation (Hence, min. 1% to max. 3%)
It is measured by CPI
130
Disinflation means that:
Prices are rising but more slowly than previously
131
A new piece of EU legislation is being introduced. It is being implemented at the same time and in exactly the same way across all members states.
This indicates that the legislation is in the form of a:
Regulation.
132
Which UK body and which EU body are responsible for monitoring the financial system for systemic risk and taking steps to reduce it?
In the UK, it is the PRA.
In the EU, it is the European Systemic Risk Board (ESRB).
