Edexcel A Level Economics A
Edexcel A Level Economics A 4.4 The Financial Sector Exam Questions
Free Edexcel A Level Economics A exam questions on 4.4 The Financial Sector, with mark schemes. Covers the role of financial markets, market failure in finance and central banks.
4.4 The Financial Sector exam questions
1 question pack of real past exam questions with its mark scheme. Answer every question without notes, then mark your answers line by line against the mark scheme.
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Edexcel A Level Economics A 9EC0 Flashcards (Anki & Quizlet)
Every answer is written in mark scheme wording, so you learn exactly what examiners give marks for. Use them on Anki or Quizlet, then test yourself with the questions on this page.
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About Edexcel A Level Economics A 4.4 The Financial Sector
4.4 explains how the financial system works and why it can fail, drawing on the 2008 financial crisis. Questions test the functions of banks and the role of the central bank.
What you need to know
- Role of financial markets Facilitating saving, lending to businesses and individuals, facilitating the exchange of goods and services, providing forward markets in currencies and commodities, and providing a market for equities.
- Market failure in the financial sector Asymmetric information, externalities, moral hazard, speculation and market bubbles, and market rigging.
- Role of central banks Implementing monetary policy, acting as banker to the government and to the banks, acting as lender of last resort, and regulating the banking system.
- Banks Commercial versus investment banks, their main functions, the structure of a balance sheet, and capital and liquidity ratios.
Common mistakes in 4.4 The Financial Sector
- Confusing moral hazard with asymmetric information.
- Describing the central bank as a commercial bank.
- Forgetting that bank failures create negative externalities for the wider economy.
- Mixing up liquidity (access to cash) with capital (a buffer against losses).
Try three 4.4 The Financial Sector exam-style questions
1. Define moral hazard. (2 marks)
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When a person or institution takes greater risks (1) because they do not bear the full cost of those risks, for example because they expect a government bailout (1).
2. Explain what is meant by the central bank acting as lender of last resort. (2 marks)
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The central bank lends to commercial banks when they cannot obtain funds elsewhere (1), preventing a liquidity shortage from becoming a bank collapse (1).
3. Explain one function of financial markets for firms. (2 marks)
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They let firms raise finance for investment (1), for example by selling shares on the stock market or borrowing from banks (1).
4.4 The Financial Sector FAQs
What does Edexcel A Level Economics 4.4 cover?
The role of financial markets, market failure in the financial sector and the role of central banks.
Do I need to know about the 2008 crisis?
It is a useful example of speculation, moral hazard and the central bank acting as lender of last resort, so it strengthens your answers.
What does the Bank of England do?
It sets monetary policy, regulates banks through the Prudential Regulation Authority, acts as banker to the government and banks, and is lender of last resort.
Revise this topic with flashcards: Edexcel A Level Economics A 9EC0 Flashcards, with mark scheme answers for Anki and Quizlet.
