Topic 2 (Economic Policy and Financial Regulation)

Question 1

What is mAcroeconomic objectives?

Answer 1

Concerns the economy as a whole

Question 2

What is mIcroeconomic objectives?

Answer 2

Concerns individual firms or consumers

Question 3

What 4 factors do Microeconomic objectives measure?

Answer 3

Price stability
Low Unemployment
Satisfactory economic growth
Balance of payment equilibrium

Question 4

What is GDP?

Answer 4

Gross Domestic Product

The value of goods produced in a country over an amount of time

Question 5

What is inflation?

Answer 5

A rise in prices resulting in too much money chasing goods. The rate of money growth is greater than the growth of goods

Question 6

What is Disinflation?

Answer 6

A fall in the rate of inflation, the prices are resisting but not as quick

Question 7

What is Deflation?

Answer 7

General fall in the price of goods

Question 8

What is Price Stability?

Answer 8

Involves low and controlled rate of inflation

Question 9

What is low unemployment?

Answer 9

The need to expand the economy so there is more demand for labour and capital

Question 10

What is the balance of payment equilibrium?

Answer 10

Aims to keep the currency stable

It’s the expenditure on imports of goods and income from investment abroad which is equal to the income relieved

Question 11

What is satisfactory economic growth?

Answer 11

The output of economy is growing and improving standards of living which is measured by GDP

Question 12

What is the definition of Recession?

Answer 12

A decline in economic activity over a period

Question 13

What are the 4 main phases of economy?

Answer 13

1. Recovery and expansion (low interest,inflation and unemployment, higher demand for goods)
2. Boom (prevent economy from overheating, increased interest rates)
3. Contraction/slowdown (interest rises and consumer spending falls)
4. Recession (lowest level of activity, reduced interest rates to stimulate demand)

Question 14

How does the UK Government measure inflation?

Answer 14

Using the Consumer Price Index (CPI) which is a measure of average prices of goods

Question 15

What is the target rate of inflation that the Government want to achieve?

Answer 15

To keep the inflation rate at an average of 2% with a maximum divergence of 1% each way (1-3%)

Question 16

What are the 2 major types of Government Policy?

Answer 16

1. Monetary (acts on interest rates and money supply)

2. Fiscal (acts on public sector spending,revenue,borrowing and saving)

Question 17

What happens when the MPC changes interest rates?

Answer 17

Banks and building societies amend interest rates to near on the same

Question 18

Name and explain the 3 outcomes of fiscal policy

Answer 18

• Balanced Budgets (economy effect is neutral, amount taken in tax is put into public spending)
• Budget Surplus (amount taken in tax is greater than the amount put back into public spending)
• Budget Deficit (public spending is greater than amount taken in taxes)

Question 19

What does a ‘Deficit’ mean?

Answer 19

Means the Government has to borrow to finance something

Question 20

What is Public Sector Net Cash Requirement (PSNCR)?

Answer 20

The cash measure of the public’s short term net financing requirements

Question 21

What is ‘The Budget’?

Answer 21

Outlines fiscal policy and includes revenue plans and the Governments planned expenditure

Question 22

Give a key feature of both Monetary and Fiscal Policy

Answer 22

Monetary policy acts on the economy as a whole whereas Fiscal Policy can have a macroeconomic effect on the economy

Question 23

Give 2 features of how changes in taxation affect the market of financial services

Answer 23

1. Increased taxation reduces the amount of money available for investment or to fund loan repayments
2. Tightening taxation regime makes them less attractive to investors

Question 24

Name the 2 forms within European law

Answer 24

1. Regulations (binding in entirely and directly applicable in all member states unless specified otherwise)
2. Directives (binding as to the result to be achieved, must be achieved in 2 years, each member state has the choice of how the objective is met)

Question 25

What is responsible for supervision on the financial system in the EU?

Answer 25

The ESRB (European systemic risk board)

Question 26

What new system was put in place ensuring that the EU central bank holds responsibility for supervising banks in Europe?

Answer 26

The SSM (single supervisory mechanism)

Question 27

What are the levels of regulatory that oversight the UK? (Starting from the bottom of the pyramid)

Answer 27

1. European Legislation (regulations and directives)
2. Acts of Parliament (FSMA act 2000)
3. Regulatory bodies (PRA/FCA)
4. Policies and Practices (compliance terms)
5. Arbitration (financial ombudsman server)