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Posted: May 5th, 2020
AFE7504-A Business Economics – Management Assignment Help
Assignment Task
Question 1: Explain the most likely causes of high inflation and reduced GDP in the UK during the last 12 months.
Question 2: Critically discuss whether stock options for managers are an effective mechanism for reducing ‘Agency Costs’?
This AFE7504-Management Assignment
Answer 1:
The most likely causes of high inflation and reduced GDP in the UK during the last 12 months are as follows:
Supply chain disruptions: The COVID-19 pandemic has resulted in significant supply chain disruptions worldwide, leading to an increase in the prices of goods and services. This has led to inflation in the UK, which has reduced GDP.
Increased energy prices: The prices of energy products, such as oil and gas, have increased globally, which has led to an increase in the cost of production and transportation. This has also contributed to inflation in the UK.
Brexit uncertainty: The UK’s exit from the European Union has created uncertainty, which has led to a reduction in investment and consumer spending. This has contributed to reduced GDP growth.
Labor market imbalances: The COVID-19 pandemic has resulted in significant labor market imbalances, with a shortage of skilled workers in some sectors and high unemployment in others. This has led to an increase in wages and reduced productivity, contributing to inflation and reduced GDP.
Answer 2:
Stock options for managers are a commonly used mechanism for reducing agency costs, but their effectiveness depends on several factors. Agency costs are the costs that arise when managers act in their own interests instead of the interests of the shareholders.
Stock options for managers are designed to align the interests of the managers with those of the shareholders by tying the manager’s compensation to the performance of the company’s stock. If the stock price increases, the manager’s compensation also increases, creating an incentive for the manager to work towards maximizing shareholder value.
However, there are several issues with using stock options for managers. First, the value of the options is highly dependent on the performance of the stock, which can be influenced by factors beyond the manager’s control, such as changes in the market or economic conditions. This can lead to situations where managers are rewarded for good luck rather than good management.
Second, there is a risk that managers may engage in unethical behavior to boost the stock price artificially, such as misreporting financial information or engaging in insider trading. This can lead to long-term damage to the company and its shareholders.
Overall, while stock options for managers can be an effective mechanism for reducing agency costs, their effectiveness depends on several factors, including the design of the options, the performance metrics used, and the company’s overall corporate governance structure.
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