1.4.1 Role of banks in the economy

Question 1

How can banks channel savings towards investments

Answer 1

By manipulating interest rate, the lower the interest rate the less reward for saving so more loans are taken out for spending or investments by firms. Also if interest rate is lower than the inflation rate, real value of savings fall and purchasing power decreases encouraging consumers to take their money out.

Question 2

What are the role of banks

Answer 2

Banks acts as creditors through supplying loans to customers or firms. They then receive their form of icome through the interest paid on the loan which is a percentage. Some may hold loans against collateral meaning the loans is secured aginst an asset. If the loan cannot be paid the bank have the right to take ownership of the asset. Loans on demand is when the loan is fully paid off and ineterst is immediately charged.

Question 3

What is the role of central banks such as Bank of England

Answer 3

MPC and other committees for other central banks will control the supply of money and base interest rate which affects the interest rate for all commercial banks. The MPC will manipulate interest rates through monetary policies in order to achieve price stability as it influences the reward fro saving and cost of borrowing.

Question 4

What is collateral?

Answer 4

This is when an asset is secured against a loan, if the loan isnt fully paid back after the certain time interval than the bank takes ownership of that asset its secured against. A common example are mortgages, banks will secure the house if mortgage isnt paid off.

25 yrs usually for a house.