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Flashcards in Macro Econmics Deck (20)
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1
Q

4 ways in which a low BOE base rate may stimulate consumer spending? (4)

A
  • savings interest rates are low
  • which reduces incentive to save
  • cheaper borrowing costs/mortgage costs
  • gives more disposable income / encourages borrowing
  • feel good factor
2
Q

Explain why low interest rates may fail to stimulate spending (8)

A
  • those relying on savings income have less to spend
  • debt interest may not reduce by the same amount
  • banks less willing to lend due to lower margins
  • debt may be repaid instead of spending
  • other political or economic factors may outweigh
  • lower consumer confidence
  • there may be time lags due to fixes terms on savings and debts
3
Q

Explain why BOE may not raise interest rates even if inflation increases significantly and exceeds the target (4)

A
  • may he seem as temporary
  • future economic uncertainty
  • risk to debtors
  • exchange rate concerns and the effect on trade
  • increasing interest rates may not impact on some types of inflation
4
Q

Definition of deflation (2)

A
  • decrease in the general level of prices of goods and services
5
Q

Why might deflation be damaging to the economy? (8)

A
  • it increases the real value of debt
  • increases value of savings
  • so investors hoard currency
  • assuming prices will continue to fall
  • reduces profits
  • leads to decreased investment
  • banks less likely to lend against falling asset prices
6
Q

Actions government / central bank can take to counteract deflation(4)

A
  • reduces interest rates
  • print money/ quantative easing/ increase money supply
  • reduces taxes

Explaination:

  • stimulates spending
  • reduces borrowing costs
  • encourageslending
7
Q

What is ‘carry trade’ (2)

A
  • borrowing in a low interest rate currency

- and reinvesting in a high yielding currency

8
Q

What are the risks of carry trade? (3)

A
  • exchange rate movements can easily erode interest rate profit
  • the strategy can increase the volatility of the exchange rates involved
  • with a ‘rush for the door’ mentality occurring when adverse movements occur
9
Q

Five factors that can affect the demand for a product (5)

A
  • price
  • the buyers income
  • the demand for alternatives
  • the demand for other goods used at the same time
  • ease of purchasing
  • whether the buyer likes the product
10
Q

Explain the price elasticity or demand (3)

A
  • measurement of the extent to which demand responds to changes in price
  • demand is said to elastic if a change (no matter how small) in price has a significant effect on demand
  • demand is said to be inelastic if price changes have little or no effect on demand
11
Q

Actions and oil exploration / production company can take if oil prices drop and effect on company finances (4)

A
  • reduces costs
  • reduce production
  • put on hold investment / exploration
  • hedge against further falls
12
Q

Four economic factors which could lead to a depreciation in the value of the sterling (4)

A
  • decreasing UK interest rates in comparison to other countries
  • declining productivity
  • higher relative inflation than other countries
  • current account deficit
  • capital account surplus
  • money supply increasing faster than productivity
13
Q

Explain impact of rising interest rates in FI and Equities (4)

A

FI

  • yields rise
  • capital values fall

Equities

  • debt costs rise / profitability reduces
  • dividends/ share prices fall
14
Q

Why may a fund increase it’s exposure to equity and commodities in response to rising inflation (4)

A
  • equities have higher profits
  • higher share price
  • demand for commodities increases
  • resulting in higher prices
15
Q

3 Reasons why price of index linked gilt may fall even in inflation is rising and expected to continue to rise (3)

A
  • if interest rates are increasing faster than inflation
  • increases supply and demand
  • inflation expectations are reducing
  • difference in RPI
16
Q

What is meant by:

  • current account
  • capital account

(6)

A

Current account

  • imports minus
  • exports
  • in goods and services
  • plus receipts from overseas income generating assets

Capital account

  • movement of all monies
  • into
  • and our of the country
17
Q

Four potential economic consequences of capital and current accounts being in deficit over the medium to long term (4)

A
  • rising interest rates
  • rising inflation rates
  • economic growth falls
  • currency devaluation
  • capital leaving the UK
  • unemployment rises
18
Q

Effect on bonds of

1) rising IR
2) rising inflation

A

Rising interest rates:

  • capital values fall
  • as the income the produce become unattractive in comparison to new issues

Rising inflation rates:

  • Capital values tend to fall if the rate of inflation is deemed to be speeding up
  • as fixed interest investments become less attractive in general
19
Q

Effect on equities of:

1) rising interest rates
2) rising inflation rates

A

Rising interest rates:

  • companies have higher debt costs
  • lower demand (as consumers struggle with higher mortgage costs)
  • leads to lower profitability
  • and smaller dividend payouts
  • and falling share prices
20
Q

Effect on income of bonds of:

1) rising interest rates
2) rising inflation

A

Rising interest rates:

  • Existing bonds become less attractive
  • newer bonds tend to be issued at a higher rate
  • interest yields increase as investors will not pay as much to buy

Rising inflation:

  • purchasing power of the fixed income falls
  • interest yields rise to compensate investors for the loss of real income