The Financial Sector | Edexcel A-Level Economics A (9EC0)
The Financial Sector
- 52 questions
- 4 subtopics
- Theme 4: a global perspective
- Paper 2 and Paper 3
Covers what the financial system is for and how it goes wrong: the roles of financial markets and central banks, and the asymmetric information, moral hazard and speculation that produce crises..
It covers role of financial markets, asymmetric information, externalities and systemic risk, moral hazard, speculation, bubbles and market rigging and role of central banks.
Sample questions from The Financial Sector
Answer each one closed book first, then open the answer.
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Role of financial markets
Give two examples of lending products that financial markets provide to individuals.
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Mortgages (for housing) and loans (for vehicles or other major purchases). -
Role of financial markets
How do financial markets provide a market for equities?
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They allow companies to raise capital by selling shares to investors. -
Asymmetric information, externalities and systemic risk
Why can asymmetric information between financial institutions and consumers lead to mis-selling of financial products?
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Sellers can exploit their superior knowledge of product features, risks, and suitability to sell inappropriate products to less-informed consumers. -
Asymmetric information, externalities and systemic risk
In what way do job losses across the wider economy represent a negative externality of financial sector failure?
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Workers in sectors unconnected to finance lose employment due to reduced credit, lower consumer spending, and economic contraction caused by financial instability. -
Moral hazard, speculation, bubbles and market rigging
Define a market bubble.
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A situation where asset prices rise significantly above their fundamental value, driven by speculative demand and expectations of further price increases. -
Moral hazard, speculation, bubbles and market rigging
What is foreign exchange rate fixing as a form of market rigging?
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Traders collude to manipulate currency exchange rates around key benchmark times to profit from their positions at the expense of clients and other market participants. -
Role of central banks
Describe the central bank's role in government debt issuance.
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The central bank organises the sale of government bonds and treasury bills, manages the register of holders, pays interest to bondholders, and redeems securities at maturity on behalf of the government. -
Role of central banks
What are capital adequacy requirements and why does a central bank impose them?
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Capital adequacy requirements mandate that banks hold a minimum ratio of capital (equity and reserves) relative to their risk-weighted assets, ensuring they can absorb losses and remain solvent during downturns.
The 4 subtopics
One subtopic is one session. Work down the list.
| Subtopic | What it covers | Questions |
|---|---|---|
| Role of financial markets | Recall questions on facilitating saving, lending to businesses and individuals, the payments system, equities and forward markets. | 14 |
| Asymmetric information, externalities and systemic risk | Recall questions on adverse selection in lending, the external costs of financial failure, bailouts and systemic risk. | 8 |
| Moral hazard, speculation, bubbles and market rigging | Recall questions on too big to fail, deposit insurance, herd behaviour and bubbles, and on benchmark manipulation and insider trading. | 13 |
| Role of central banks | Recall questions on monetary policy, banker to the government and to the banks, lender of last resort, and regulating the financial system. | 17 |
How the guide is worked
Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.
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Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
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Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
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Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.
Read the full method, the return schedule and the research behind it.
Nearby topics
Edexcel A-Level Economics A Active Recall Guide
Every topic, not just this one. 2,508 questions with their answers.