Topic 16: Financial management environment Flashcards
What is microeconomic policy? and what are the main examples?
They are the different ways a government manages the economy of the country.
The main example includes:
Economic growth
Stablizing inflation Usually 2%
Maintaining high level of employment
Ensure appropriate distrubution of wealth and income.
Keeping balance of payments within a set range (Balance between imports and exports)
What is aggregate demand?
It is the total demand for goods and services in an economy, its the key driver for growth, inflation and employment.
If aggregate demand is too low = Lower growth and employment
If aggregate demand is too high = high inflation.
What is Monetary policy?
Montary policy is how the government controls money via the supply of money and interest rates.
Interest rates can affect aggregate demand for example:
If interest rates increase it decreases the amount people have to spend = decrease in aggregate demand
If interest rates decrease it increases how much people have to spend = increases aggregate demand.
What are the different types of Fiscal Policy?
Fiscal policy is the management behind teh government spending and income. examples of this is:
Income = Taxes raised and borrowing
Expenses = Public services and repaying government borrwing.
The two different types are Expansionary which is when a government increases its borrowing by reducing taxes and increases spending.
The other type is Contractionary and its where borrowing decreases by increasing taxes and reducing spending this also decreases aggregate demand.
What are the different types of inflation?
Demand pull inflation - Too much demand which causes businesses to increase prices.
Cost push inflation - increase in input cost, increases the cost of production and this is passed on to consumers.
What is Government policy? and what can they do?
Government intervention and regulation - government can intervene in the regulation of business in a number of ways, which include:
Competition policies - a government can can investigate and prevent anti-competition agreements - Monopolies.
Green policies - Externalities is a term which refers to wider costs which cant be measured like the cost of pollution.
Government assistance - Providing grants and subsidies to boost enterprises, innovation and improved skills.
Corporate governance - Helps shareholders have control of their companies, More regulations on how a company operates.
What are the different types of financial markets?
Capital markets - Where long term capital is rasied e.g ordinary, preference and bonds (This is a stock market).
Money Markets - Short term fund, for trade finance and liquidity.
What are the different money market instruments?
Interet bearing instruments - Pay interest to investors and money is given after a certain amount of time, investor is given a certificate which is tradable.
Discount bearing instruments - Sercurities issued at a discount to the redemption value but no interest to be received e,g treasury bills, commercial paper (commercial bills).
What is a financial intermediation and what are their roles?
A third party who bring together potential lenders and potential borrowers.
Their role:
Risk reduction - lending to many individuals, it reduces the risk of default.
Aggregation - putting together small deposits then the finacial intermediaries lends the large pot to a company as an investment.
Maturity transformation - Matches saver who want it for the short term and people who want it for the long term as it all goes in the pot.
