role of credit in the economy

Question 1

How do banks encourage/discourage saving and investing?

Answer 1

They manipulate interest rates, so high interest rates encourage saving and discourage investing.

Question 2

What is a bank’s main source of profit and how do they earn this?

Answer 2

A bank’s main source of profit is interest rates, which they earn through loaning consumers money.

Question 3

What is the role of a central bank?

Answer 3

To manipulate interest rates, the exchange rate and the money supply.

Question 4

Name the rate that central banks control, which determines overall interest rates.

Answer 4

The base rate.

Question 5

What is a mortgage?

Answer 5

A mortgage is a loan taken out to buy a house, whereby the house is used as collateral in the event of default.

Question 6

What is the Monetary Policy Committee (MPC) and what do they do?

Answer 6

A group of nine members, independent of the government, who meet frequently to discuss future interest rate changes.

Question 7

Define risk.

Answer 7

The probability of damage, loss or injury occurring.

Question 8

How do banks face risk?

Answer 8

They face risks when they lend money as there is the possibility of that debt not being repaid.

Question 9

Recall the difference between limited and unlimited liability.

Answer 9

In the event of insolvency, unlimited liability leaves the owner of the firm at risk of their own assets being repossessed to meet their financial obligations, whereas limited liability results in the owner only having to pay back what they invested in the firm.

Question 10

Name 3 different types of credit.

Answer 10

• Loans
• Overdraft
• Trade credit

Question 11

What is trade credit?

Answer 11

This is a loan to a firm given by its suppliers, so the goods can be bought immediately and paid for at a later date.

Question 12

Recall the pros and cons of overdrafts.

Answer 12

Pros;
- The interest is only paid on the money borrowed
Cons;
- The interest rates are very high
- The amount you can borrow is limited

Question 13

Recall 4 examples of sources of credit.

Answer 13

• Banks
• Venture capital
• Share capital
• Leasing

Question 14

What is Venture Capital?

Answer 14

When a specialist firm provides funding in return for a share of the company.

Question 15

What is a major benefit of using personal savings to finance ventures?

Answer 15

There is no interest paid, because the money is yours.

Question 16

Define retained profit.

Answer 16

Money left after taxes and other fees have been deducted.

Question 17

In what scenario would it be wise for a firm to sell its assets to finance operations?

Answer 17

When the assets in question are no longer used or outdated.

Question 18

Where is collaborative funding usually conducted?

Answer 18

On the internet.

Question 19

Why would it be more expensive for small firms to access credit than larger firms?

Answer 19

It takes time for small firms to build a strong credit history, and so they must pay higher interest rates than larger firms with good credit histories.