The Financial Sector (Edexcel A Level Economics A)

Exam Questions

36 mins11 questions
1
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5 marks

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

(Source: adapted from ’UK companies use pound strength to hedge forex risk’ by Roger Blitz, Markets, © FT.com, 16 May 2017. https://www.ft.com/content/d50ce580-3968-11e7-ac89-b01cc67cfeec)

With reference to Extract A, explain the role of forward markets in currencies.

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2
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1 mark

What is the primary role of financial markets in an economy? 

  • To provide goods and services to consumers

  • To facilitate the exchange of money for goods

  • To channel funds from savers to borrowers

  • To regulate government spending

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3
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How do financial markets help allocate resources in an economy?

  • By imposing price controls on goods and services

  • By promoting economic inequality

  • By directing funds to their most productive uses

  • By restricting trade between countries

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4
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1 mark

Which of the following is a form of market failure that can occur in financial markets?

  • Perfect competition among financial institutions

  • Inadequate consumer protection regulations

  • Efficient allocation of capital

  • Self-regulation by financial firms

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5
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Which of the following best describes moral hazard in the financial sector?

  • It involves ethical dilemmas faced by financial professionals

  • It refers to the increased risk-taking by financial institutions due to government bailouts

  • It concerns the willingness of individuals to save and invest

  • It is the practice of self-regulation by financial firms

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6
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Why is moral hazard a concern in the context of insurance and asymmetric information?

  • Moral hazard occurs when insurers refuse to pay claims

  • It can lead to policyholders taking on excessive risks because they are insured

  • It refers to the unfair distribution of insurance coverage

  • Asymmetric information has no connection to moral hazard

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7
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1 mark

What does a central bank typically do to influence the economy?

  • Regulates the stock market

  • Manages fiscal policy

  • Controls the money supply

  • Oversees international trade agreements

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8
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Why is a "lender of last resort" important in the field of central banking and financial stability?

  • To promote price stability through interest rate changes

  • To ensure a stable and functioning banking system during crises

  • To provide subsidised housing loans to citizens

  • To control the national defense budget

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1
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5 marks

With reference to Extract A, explain the role of forward markets in currencies (5)  

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

(Source: adapted from ’UK companies use pound strength to hedge forex risk’ by Roger Blitz, Markets, © FT.com, 16 May 2017. https://www.ft.com/content/d50ce580-3968-11e7-ac89-b01cc67cfeec)

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2
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4 marks

With reference to the information below, explain one role of financial markets

In May 2020, the UK government introduced a loan scheme to help small businesses survive the downturn in the economy. Small businesses could borrow up to £50000 at an interest rate of 2.5% for up to 6 years from a bank. The government guaranteed 100% of the loans, to enable banks to issue them quickly, and only minimal checks were made on borrowers.

(Source: adapted from https://www.ft.com/content/1ca15db2-93e4-4e34-877d-110309cd9716)

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15 marks

Discuss whether providing substantial government financial support to banks is the best policy response during a financial crisis (15)

The UK economy since the financial crisis Figure 1: Pound sterling to US$ exchange rate, 2016-17

9ec0-02-q6-fig-1-june-2019

Extract A

UK companies use forward currency market

The Norfolk-based picture frames maker Nielsen Bainbridge recently made forward contracts in the foreign exchange market to reduce the impact of currency fluctuations. The pound’s post-Brexit referendum depreciation has been a test of nerve for Nielsen Bainbridge and many other importers. At present the company’s suppliers are located in Europe or China. “Currency therefore has a big impact on our business and the margins we can obtain,” says Ms Burdett, the Finance Director. Forward contracts enable institutions, businesses and individuals to lock in an exchange rate over a certain period of time regardless of how the rate moves during that time. Ms Burdett buys currency as soon as Nielsen Bainbridge confirms a large order as a way to fix costs. One third of UK business managers are considering shifting from EU to UK suppliers.

(Source: adapted from ’UK companies use pound strength to hedge forex risk’ by Roger Blitz, Markets, © FT.com, 16 May 2017. https://www.ft.com/content/d50ce580-3968-11e7-ac89-b01cc67cfeec)

Did this page help you?