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Economics Paper 1 > 1.4 The Role of Banks in the Economy > Flashcards

1.4 The Role of Banks in the Economy Flashcards

1
Q

Define the term bank

A

A financial intermediary that channels funds from savers to borrowers

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2
Q

Define FInancial Intermediary

A

Someone who provides an indirect link between those who want to save and those who want to borrow

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3
Q

How do banks enhance the economy?

A

Provide spending money through credit which increase spending and boosts GDP

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4
Q

Why may banks reduce the amount of credit they provide?

A

If they don’t have enough financial deposits when interest rates are low (e.g. credit crunch)

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5
Q

Define collateral

A

Assets that can be reclaimed should a loan not be paid

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6
Q

How does a change in interest rates affect the amount of borrowing and saving?

A

Interest Rate up:

  • More saving
  • Less borrowing
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7
Q

Define risk

A

A measure of the likelihood that a particular event may or may not happen, not knowing the outcome but knowing the possibility of its occurrence

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8
Q

Give 5 ways in which banks evaluate risk

A
  • Give a wide range of loans to spread risk
  • Study outcomes and identify problems
  • Banks gain experience over time
  • Some banks are specialised
  • Banks lend to each other
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9
Q

How do banks spread risk?

A

Give a wide range of different loans

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10
Q

Define limited liability

A

Where a business owner is only liable for their original investment should they fall into debt

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11
Q

Define unlimited liability

A

If the business falls into debt, the business owner is responsible, even if it requires selling their personal assets

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12
Q

Define sole trader

A

Someone who runs a business on their own

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13
Q

Why would someone want to have unlimited liability?

4

A
  • They get all the profits
  • They are their own boss
  • Less paperwork
  • Easier to shut down if it fails
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14
Q

Why would someone want to have limited liability?

A
  • Not personally liable for debt
  • Shareholders protected
  • Raising finance is easy with shareholders
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15
Q

Give a disadvantage of unlimited liability (not having to personally pay debt)

A

Harder to raise finances with no shareholders

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16
Q

Give 3 disadvantages of having limited liability

A
  • Have to pay an accountant to look at their finances
  • Must make their accounts public
  • Can grow large and become messy to run
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17
Q

What does LTD mean a firm is?

A

Private

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18
Q

What does PLC mean a firm is?

A

Public

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19
Q

Define LTD

A

A firm with a select group of shareholders

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20
Q

Define PLC

A

A firm where anyone can buy shares on the stockmarket

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21
Q

Give 4 reasons for raising finance

A
  • Pay debt
  • Business expansion
  • Starting up
  • Buying stock
22
Q

Give the 2 types of finance sources

A

Internal - coming from inside the business

External - coming from outside the business

23
Q

What is a loan?

A

Where a bank lends money to a business

24
Q

What is the disadvantages of a loan? (2)

A
  • Affected by interest rates

- Requires collateral

25
Q

What is the advantage of a loan?

A

Quick and easy

26
Q

What is an overdraft?

A

Where a business can acquire a set amount of extra cash on their account

27
Q

Give 3 disadvantages of an overdraft

A
  • High interest rates
  • Heavy fines if they go over
  • Very short term
28
Q

What is trade credit?

A

Extended time on a buy-now-pay-later scheme

29
Q

Why is trade credit good?

A

There is no cash paid on the spot

30
Q

Why is trade credit bad?

A

Short term

31
Q

What is venture capital?

A

Individuals that buy equity of a company

32
Q

Why is venture capital good? (2)

A
  • Direct

- Can be large sums of money

33
Q

Why is venture capital bad?

A

Lose control of some of your company as you give away equity

34
Q

What is share capital?

A

Funding invested by current shareholders

35
Q

Why is share capital good?

A

Doesn’t have to be paid back

36
Q

What is leading?

A

Loaning equipment or vehicles

37
Q

Why is leasing good?

A

Allows regular updates

38
Q

Why is leasing bad?

A

You will never actually own the product

39
Q

Why is the owner’s capital savings a good source of finance?

A

Doesn’t have to be paid back

40
Q

Why is the owner’s capital savings a bad source of finance?

A

The owner personally loses money

41
Q

How can retained profit be used as a source of finance?

A

The company may have profit that they can reinvest into the business

42
Q

Why is retained profit a good source of finance?

A

There is no interest to pay

43
Q

Why is retained profit a bad source of finance?

A

Not possible in the early stages of business life

44
Q

Why is the sale of assets a bad source of finance?

A

They lose their assets that may be used in production

45
Q

Why are angel investors a good source of finance?

A

They can offer advice and expertise

46
Q

Why are angel investors a bad source of finance?

A

They take a percentage equity

47
Q

How can online collaborative funding be a source of finance?

A

A large number of people fund a project over the internet

48
Q

How can online collaborative funding be a bad source of finance?

A

You either have to give away equity or take time to send donators information

49
Q

How can online collaborative funding be a good source of finance?

A

Donations don’t need to be given equity

50
Q

How can credit be bad for the economy?

A

If a loan can’t be paid off, the business will have to close and the government will lose revenue

51
Q

How can a business closing be bad for the economy?

A

Unemployment increases

Spending is reduced

Economics Paper 1 (11 decks)

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