U1: T2 - ECONOMICS POLICY AND FINANCIAL REGULATION Flashcards
(39 cards)
What is meant by a ‘macroeconomic objective’?
An objective that relates to the economy as a whole, rather than to a specific sector or individual company.
The European Union has issued a new regulation. This means
that each member state:
a) has the choice whether or not to adopt the regulation.
b) must pass legislation to implement the regulation within two years.
c) is bound by the regulation in its entirety regardless of existing legislation.
d) has the choice of how to adopt the regulation’s objectives
Answer c) is correct. Each member state is bound by the regulation in its entirety regardless of existing legislation. Answers a), b) and d) relate to directives.
Post-Brexit, which of the following is correct when the EU changes a regulation or introduces new regulation?
a) The UK is legally required to adopt or implement the new
or reformed EU regulation.
b) The UK is legally required to ignore the new or reformed EU regulation entirely.
c) The UK should consider whether it adopts a new regulation or develops its own alternative approach; and, in the case of reformed EU regulation, whether it wishes to amend the legislation it onshored before Brexit.
Answer c) is correct. The UK is not legally required to adopt or ignore a new or reformed piece of EU regulation but has the freedom to consider whether it adopts the regulation or develops its own approach.
What are the four key macroeconomic objectives that UK governments generally seek to achieve?
Price stability, low unemployment, a balance of payments equilibrium and satisfactory economic growth.
What is a potential negative consequence of expanding economic growth to reduce unemployment?
Measures taken to expand the economy (eg reducing interest rates and taxation) increase the demand for goods and services, which is likely to result in a rise in inflation
All governments aim to achieve zero inflation. True or false?
False. They aim to keep prices stable, but seeking to reduce inflation to zero is likely to increase unemployment.
What is the UK government’s inflation target and how is it measured?
The UK government’s inflation target is 2 per cent with a maximum divergence either side of 1 per cent. It is measured by the Consumer Prices Index.
Disinflation means that:
a) prices are rising faster than previously.
b) prices are falling.
c) prices are rising but more slowly than previously.
d) prices are staying the same
c) Prices are rising but more slowly than previously.
In June, the Monetary Policy Committee (MPC) decides to raise the Bank rate by half a percentage point. In August, Paul and Amanda’s mortgage payments increase. Explain how these two events are likely to be linked.
Paul and Amanda must have a variable‐rate mortgage, so the amount they pay each month is likely to rise and fall broadly in line with changes in the Bank rate.
Which of the following economic measures taken by a government would not help to achieve a budget surplus?
a) Increasing taxation.
b) Increasing public spending.
c) Reducing public spending.
b) Increasing public spending. To achieve a budget surplus a government must cut public spending, raise taxes, or both.
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 member states. This indicates that the legislation is
in the form of:
a) a directive.
b) a regulation.
A regulation. Member states have flexibility in the way they introduce directives
Which UK body and which EU body are responsible for monitoring the financial system for systemic risk and taking steps to reduce it?
The Bank of England for the UK and the European Systemic Risk Board (ESRB) for the EU.
What are the government’s 4 main macroeconomic objectives?
- Price stability;
- Low unemployment;
- Stable economic growth;
- Balance of payments equilibrium;
Define Inflation?
A sustained increase in the general level of prices of goods and services, resulting from “too much money chasing too few goods”. In more formal economic terminology, it can be defined as a situation where the rate of growth of the money supply is greater than the rate of growth of real goods and services.
Define Disinflation?
A general fall in the price of goods and services. In other words, the inflation rate is below zero per cent – a negative inflation rate.
Define Recession?
A significant decline in economic activity over a sustained period. Technically, it is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Define Gross Domestic Product (GDP)?
GDP is a measurement of a country’s overall economic activity. Technically it is the monetary value of all the goods and services produced within the country (ie ‘domestically’) in a given period, eg one year.
Define Bank Rate?
The rate at which the Bank of England lends to other financial institutions. In this text the term ‘Bank rate’ is used, but you might also see it written ‘Bank Rate’ or referred to as ‘base rate’.
What is the inflation target? And what is the main measure of inflation?
The level of inflation that economists judge is appropriate to keep the national economy functioning efficiently. As we have seen, in the UK the inflation target (at the time of writing, January 2022) is 2 per cent, as measured by the Consumer Prices Index, with a 1 per cent maximum divergence either way. The Bank of England has responsibility for achievement of the government’s inflation target. Current and predicted future levels of inflation are a key consideration in setting the Bank rate.
Define Direct Taxes?
Apply to individuals and their assets (income tax, capital gains tax, inheritance tax, National Insurance).
Define Indirect Taxes?
Applied to goods and services at the time they are purchased (eg VAT, stamp duty).
Define Fiscal Policy?
The adjustment of levels of taxation and public spending in a way that is intended to achieve the government’s macroeconomic objectives.
Define Public Sector Net Cash Requirement?
A government that has a deficit must borrow to finance it. The public sector net cash requirement (PSNCR) is a cash measure of the public sector’s short term net financing requirement.
What are 3 characteristics of Regulations?
Regulations:
1) Have general application.
2) Are binding in their entirety, both in respect of what is to be achieved and how it is to be achieved.
3) Are directly applicable in all member states (unless particular states have specific dispensation).
