OCR A Level Economics
OCR A Level Economics The Financial Sector Exam Questions
Free OCR A Level Economics exam questions for The Financial Sector, with a mark scheme for every pack. Covers money and its functions, financial markets, commercial and central banks, market failure in finance and financial regulation.
The Financial Sector exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
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A-Level Economics Flashcards for 2027 Onwards
Every answer is written in mark scheme wording, so you learn exactly what examiners give marks for. Then test yourself with the questions on this page.
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About OCR A Level Economics The Financial Sector
The Financial Sector is a Macroeconomics topic in OCR A Level Economics. You study the role of money and financial markets in the economy, the functions of commercial banks and the Bank of England, and how interest rates are determined. You also examine why financial markets can fail, through asymmetric information, moral hazard, speculation and systemic risk, and how regulation tries to make the financial system more stable. The topic connects closely to monetary policy in Implementing Policy and to the global context, because capital flows and financial crises spread across countries. Examiners reward knowledge of how banks create credit and clear evaluation of financial regulation.
What you need to know
- Money The functions of money: medium of exchange, store of value, unit of account and standard of deferred payment. Narrow and broad money.
- Financial markets The money market (short-term lending), the capital market (long-term borrowing through shares and bonds) and the foreign exchange market. They link savers and borrowers.
- Commercial banks Banks accept deposits, make loans and create credit. They balance liquidity, profitability and security, and hold capital and liquid assets to manage risk.
- Central banks The Bank of England sets monetary policy, acts as lender of last resort, issues banknotes and supervises the financial system for stability.
- Market failure in the financial sector Asymmetric information, moral hazard (risky lending when institutions expect rescue), speculation and asset bubbles, market rigging and externalities when a bank failure spreads to the wider economy.
- Regulation Capital and liquidity requirements, stress testing and supervision aim to reduce systemic risk. Evaluate the costs of regulation and the risk of regulatory failure.
Common mistakes in The Financial Sector
- Thinking banks only lend out deposits. Commercial banks create new deposits when they lend, so they create credit.
- Confusing liquidity with profitability. Liquid assets can be turned into cash quickly but usually earn less.
- Describing moral hazard as the same as asymmetric information. Moral hazard is a change in behaviour when the cost of risk is borne by others.
- Ignoring the wider effects of a bank failure. Financial crises reduce lending, confidence and AD across the economy.
- Assuming more regulation is always better. Strict rules may reduce lending and growth.
Try three The Financial Sector exam-style questions
1. State two functions of a central bank. (2 marks)
Show the mark scheme answer
Any two from: setting monetary policy; lender of last resort; issuing banknotes; banker to the government; regulating and supervising banks; managing foreign currency reserves.
2. Explain why moral hazard can lead to market failure in the financial sector. (4 marks)
Show the mark scheme answer
If banks expect to be rescued by the government, they do not bear the full cost of failure; they take excessive risks to increase profits; risky lending increases the chance of a crisis; the costs fall on taxpayers and the wider economy; resources are misallocated.
3. Evaluate whether stricter regulation of banks benefits the economy. (12 marks)
Show the mark scheme answer
Higher capital and liquidity requirements reduce the risk of bank failure and financial crises; protect depositors and taxpayers; evaluation: banks may lend less, reducing investment and growth; compliance costs; activity may shift to less regulated shadow banking; regulators face asymmetric information; supported judgement.
The Financial Sector FAQs
What does OCR A Level Economics The Financial Sector cover?
It covers money and its functions, financial markets, the roles of commercial and central banks, market failure in the financial sector and financial regulation.
Which paper is The Financial Sector examined in?
It is examined in Paper 2, Macroeconomics (H460/02) and may also appear in Paper 3, Themes in Economics.
What examples are useful for The Financial Sector?
The 2007 to 2008 global financial crisis is the key example of asymmetric information, moral hazard and systemic risk, and it explains why bank regulation was tightened.
