CISI Introduction to Securities and Investments Chapter 2

What is an economy?

A system where people and organisations produce, distribute, and consume goods and services.

What are the three main types of economic systems?

Market economy, command economy, and mixed economy.

What is a market economy?

An economy where supply and demand determine prices and production.

What is a command economy?

An economy where the government controls production, pricing, and distribution.

What is a mixed economy?

A system combining elements of both market and command economies.

What are the main government objectives in an economy?

Economic growth, low inflation, low unemployment, balance of payments stability, and fair income distribution.

What does fiscal policy involve?

Government decisions on taxation and public spending to influence the economy.

What is expansionary fiscal policy?

When government increases spending or cuts taxes to boost growth.

What is contractionary fiscal policy?

When government reduces spending or increases taxes to slow the economy.

What is monetary policy?

The control of money supply and interest rates to achieve economic stability.

Who sets UK monetary policy?

The Bank of England’s Monetary Policy Committee (MPC).

What is the inflation target set by the Bank of England?

2% CPI inflation.

How does the Bank of England control inflation?

By raising or lowering the Bank Rate (interest rate).

What is quantitative easing (QE)?

A policy where central banks buy financial assets to inject money into the economy.

What is inflation?

A sustained rise in the general price level of goods and services.

How is inflation measured in the UK?

By the Consumer Prices Index (CPI).

What is deflation?

A fall in the general price level of goods and services.

What is the impact of high inflation?

It reduces purchasing power and creates uncertainty for businesses and consumers.

What is GDP?

Gross Domestic Product – the total value of goods and services produced in an economy over a period.

What are the components of GDP?

Consumption, Investment, Government Spending, and Net Exports (C + I + G + (X - M)).

What is economic growth?

An increase in real GDP over time.

What is a recession?

Two consecutive quarters of negative GDP growth.

What are the four stages of the business cycle?

Expansion, Peak, Recession, and Recovery.

What is unemployment?

When people who are able and willing to work cannot find a job.

Name two types of unemployment.

Frictional and structural unemployment.

What is the balance of payments?

A record of all economic transactions between a country and the rest of the world.

What is the current account?

It records trade in goods and services, income, and transfers.

What is a budget deficit?

When government spending exceeds tax revenue.

What is the national debt?

The total amount the government owes, accumulated over time.

What are exchange rates?

The price of one currency in terms of another.

What causes exchange rates to change?

Interest rates, inflation, trade balance, and investor confidence.

What is globalisation?

The increasing interconnection of economies through trade, finance, and technology.

What is free trade?

Trade without tariffs, quotas, or restrictions between countries.

What is protectionism?

The use of tariffs or quotas to protect domestic industries from foreign competition.

What is the role of the IMF?

To promote global monetary cooperation and financial stability.