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Table of Contents
Question 1: Explain the most likely causes of high inflation and reduced GDP in the

UK................................................................................................................................................4

During the last 12 months................................................................................................4

High Inflation.......................................................................................................................4

Question 2: Critically discuss whether stock options for managers are an effective......6

The mechanism for reducing 'Agency Costs'?.................................................................6

Optional Stock Purchase Plan for Manager.........................................................................8

(GDP) decreased.

Inflation is typically defined as a persistent rise in the average price of goods and services across

an economy. Assuming that the equilibrium price level for items and services in a domestic

market grows consistently over time as a result of recurring excess demand situations. In such

cases, economists typically refer to demand-driven inflation (Kibritçioglu, A. 2001).

High Inflation
The CPIH (Consumer Price Index including Owner-Occupier Housing Costs) increased

by 9.6% between November 2021 and October 2022. This was the highest rate of inflation since

December 1980, when it was 9.8 percent. As a result of the fighting in Ukraine, the price of

energy skyrocketed, resulting in a large spike in inflation (Razin, 2018).

The majority of the price of foods and etc rise was due to housing and related charges

(mostly the cost of utilities like electricity, gas, and gasoline). Because of the increased cost of

household energy supplies, there was substantial inflation. Food, soft drinks, and products
utilised in the arts and recreation all increased in price. Large, partially offsetting negative

consequences were identified in the transportation sector, particularly with regard to the costs of

fuel and used autos (Expectations of high inflation, 2020).

Rising or higher inflation typically precedes economic recessions. An economic recession

happens when a country has shocks in income and manufacturing for a protracted time,

notwithstanding economic expansion, and when the value is negative for two consecutive

quarters, according to experts. Other situations that may arise include an increase in the rate of

inflation, an increase in the rate of unemployment, a decrease in retail goods to a detrimental

gross domestic product, and a decline in retail products.

The cost of housing and the house section increased by 11.7% between November 2021 and

October 2022. These price increases followed the government's Energy Price Guarantee (EPG),

which was in force from 1 October 2022 to 31 March 2023. The adoption of EPG resulted in a

24.3% increase in utility costs in September and October of 2022. Without the EPG, the cost of

electricity, gas, and other fuels would have been around 75% (rather than 24%) of what it is

currently. As a consequence, the total CPIH rate would be close to 11.8% in October 2022, with

the effect on electricity rates, gas prices, and other energy expenditures increasing from 2.59% to

nearly 4.8%. Food and non-alcoholic drinks increased by 16.4% between November 2021 and

October 2022. The price fluctuations of ten of the eleven granular goods affected the yearly rate

increase for food and drinks. The most significant price increases were noticed in dairy goods

and eggs, including store-bought milk and cheddar cheese. The annual inflation rate was 0.06%,

while the arts and entertainment sector increased by the same amount. Audiovisual equipment

and recording media accounted for 0.06 percent of the total. Price hikes for creative services and

paper work in September and October 2022 had minimal impact (Harigaya & Ibe, 2014).
 Following a peak of 15.2% in June 2022, transportation costs fell to 9.3% in October

2022. The effect on the annual variation of the inflation rate was negative, at 0.18%. The

transportation sector's declining trend was sensitive to lowering gasoline prices in October 2022,

with major negative repercussions for fuel (0.09%) and secondhand autos (0.07%). High

inflation and an economic bottleneck were two of the issues that the UK economy faced. High

inflation in the United Kingdom has left economic forecasts for the rest of the world in the dark.

The fundamental reason was supply-side limitations caused by the COVID-19 epidemic, which

were aggravated by the crisis in Ukraine and Russian sanctions ('Brexit' might bring deeper UK

GDP downturn ahead, 2016).

The economy has contributed to the anxiety. Customer satisfaction, the labour mlabor

and the broader economy all vary greatly. The possibility of greater inflation, which diminishes

purchasing power, may upset the public's trust in the future. The deterioration of industrial

relations, including rare strikes, may be attributed in part to the fact that inflation is growing

faster than salaries.

Recent political uncertainty has exacerbated the already difficult climate for financial

markets. The new prime minister entered office soon after the summer. The political atmosphere

is entirely indistinguishable. Because of this policy wiggle room, UK assets may see a slight

increase in risk premium; but, given that no general election is anticipated for the near future, a

major policy shift is highly unlikely.

According to the latest recent statistics from the Office of National Statistics (ONS), GDP

dropped by 0.3%. The petroleum and natural gas sectors saw a severe slowdown in August as a

result of a drop in output and maintenance (Inflation pressures remain high, 2022). Reduced
government investment following the COVID-19 outbreak was a significant contribution to the

UK's declining industrial output. The Bank of England has predicted a recession in the world's

fifth-richest country from late 2022 to early 2024, owing mostly to the impact of rising oil costs

caused by the Ukraine situation. Previous but not least, a weak pound has been blamed for higher

inflation and lower GDP in the United Kingdom during the last year. As the pound falls in value,

buyers of British products and services will pay more for them. Both declining economic activity

and rising inflation lead to a lower GDP. High inflation and lower GDP in the United Kingdom

during the previous year are most likely the result of Brexit, increased oil costs, government

efforts, and a weak pound. Raising the cost of goods and services, these factors have contributed

to rising inflation and a drop in economic activity.

Question 2: Critically discuss whether stock options for managers are an effective mechanism
for reducing 'Agency Costs'?
Corporate governance challenges are prevalent in many major firms. Inefficient

investment may be one of the consequences of manager-shareholder agency concerns . Instead

than investing in initiatives for the benefit of shareholders, management may do so .

The phrase "Agency Costs" refers to the money shareholders spend on paying managers

to run the firm. An internal expense borne by an agent operating on behalf of a principal

(Maurovi & Hasi, 2013). Internal expenses resulting from conflicts between proprietors

(shareholders) and managers are another definition of agency costs (agents). For the CFI

(corporate Finance International Group, 2022). When individuals talk about "agency expenses,"

they're referring to the money spent on things like mediation and relationship maintenance

throughout a quarrel. These expenditures are the result of divided ownership and management.

Shareholders desire to improve shareholder value even when management makes decisions that

are not always in the best interests of the shareholders.

• The expenditures incurred by investors when they interfere to ensure that management is not

prioritizing their personal requirements above those of the firm as a whole.

• Expenses incurred as a result of the agent's (management team's) private exploitation of

business assets.

Furthermore, agency expenditures can be divided into direct and indirect categories. Direct

agency expenditures are classified into two types:

(1) Executive compensation at the expense of shareholders in corporate spending;

(2) The expense of monitoring management to ensure they are fulfilling their Principal-agent

duty.

Indirect agency costs are a metaphor for lost opportunities.

A corporation's management (agent) reports to its shareholders (principal) (principal).

The principal-agent relationship has a large impact on agency expenditures. In a principal-agent

relationship, one party (the principal) legally authorises another (the agent) to do specified tasks

on its behalf. Principal-agent conflicts arise when the aims of the principal and the agent clash.

Then there are the agency fees. In a principal-agent relationship, an incentive structure is a

common way to reduce agency expenditures.

monetary incentives are utilised to inspire people. Agents are more inclined to act in the best

interests of the organisation if they are financially paid for it. Money-based motivations include:

 Management receives a part of the company's profits in two ways: stock options, which

provide the holder the right to buy a set number of shares at a defined price, and profit sharing.

 Non-monetary incentives are used significantly less frequently than monetary

incentives and are generally less efficient in cutting costs. Examples of non-monetary rewards

include:

 A whole new working environment,

 Training, whether paid or free,

 Peer evaluation,

 A vehicle owned by the company.

There will always be expenses connected with running a government organisation.

Incentives may be included in agency expenses. Instead of allowing managers to make decisions

based on their own personalities, which would almost always result in greater expenses, these

incentives try to reduce these expenditures.

Optional Stock Purchase Plan for Manager

opportunity at the option's strike price and expiration date. Equity options issued by a

corporation differ from market-traded stock options in that they are solely available to employees

of that company (Minardi & Rooney, 2021). A stock option provided to an employee is

essentially a buy warrant for a particular number of shares of company stock at a fixed price

within a certain time frame. The right to exercise an ESO is frequently subject to a vesting
period. If the stock's market price has grown after the vesting periods have expired, the employee

stands to benefit significantly by exercising the options.

Employee stock options are not traded on public exchanges since they are given solely by

corporations. If an employee exercises an ESO, the company must issue shares to the employee,

increasing the total number of outstanding shares and dilution of current owners. In order to

properly comprehend the dilutive effect of these awards, investors must be informed of the total

amount of outstanding employee options. The executive's compensation package includes a base

income, short-term incentives such as a bonus, long-term incentives such as stock options, stock

ownership, and other benefits, and amenities such as gym memberships, as well as the risk of

termination if performance is poor. Stock options are frequently used to reward the CEO because

they are an excellent tool for better-aligning managers' wealth with that of the firm's

shareholders. Stock option compensation, on the other hand, is a poor concept that would surely

perish if not for dishonest bookkeeping. To begin, stock options provide extremely skewed

incentives for management to engage in activities with excessively unfavorable risk. Option

owners partake in earnings but carry no risk of failure. A rational option holder would expose the

company to potentially catastrophic risks while having no emotional stake in averting losses.

Second, the discount rate on stock and stock options is too high. The market's reaction to

the stock's high volatility, as well as the market's pessimism about the usage of retained earnings,

both contribute to the significant discount. If the discount rate is high, the executive will either

receive the smallest present value for each dollar paid, or the largest future cash payment will be

required for each dollar of present value. Executives are under-diversified, hence they

undervalue stock and stock options even in comparison to market value. Fourth, while workers

may benefit from stock options, it is generally more economical for companies to keep such
profits to themselves. Receiving compensation in stock options is a poor incentive structure.

Managers have a lot of alternatives and an incentive to lead the corporation towards suicidal

risks because they won't have to bear the same losses as the shareholders. Furthermore, stock and

stock options are inadequate sources of payment since they include risks that management

cannot and does not want to undertake.

As a result, it is evident that depending on stock options to decrease "Agency Costs" for

managers is a lousy idea. Stock options for managers are not a failsafe strategy to reduce

'Agency Costs,' as previously supposed. Finally, it is obvious that manager stock options may be

a beneficial strategy for reducing agency expenditures. Managers are incentivized to take

activities that benefit shareholders since they gain directly from any increases in the firm's stock

price. Managers are more inclined to make decisions that benefit the company as a whole rather

than their own personal agendas when they have this motivation.
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"Expectations of high inflation" (2020) The Behavioral Economics of Inflation Expectations, pp.

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Harigaya, K. and Ibe, M. (2014) "Phase locked inflation. effectively trans-planckian

natural inflation," Journal of High Energy Physics, 2014(11). Available at

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