Photo AI
In May 2020, the UK government introduced a loan scheme to help small businesses survive the downturn in the economy - Edexcel - A-Level Economics A - Question 5 - 2022 - Paper 2
Question 5
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 £50,000 at ... show full transcript
Worked Solution & Example Answer:In May 2020, the UK government introduced a loan scheme to help small businesses survive the downturn in the economy - Edexcel - A-Level Economics A - Question 5 - 2022 - Paper 2
Step 1
Explain one role of financial markets.
Answer
Financial markets play a crucial role in lending to businesses and individuals, which is essential for fostering economic activity. In this context, the loan scheme introduced by the UK government demonstrates how financial markets provide funds to small businesses that are critical in helping them survive economic downturns.
By facilitating loans, financial markets allow businesses to access capital necessary for operational needs and investments. For example, many small businesses required loans to manage their cash flow and sustain their operations during the downturn. The ability to borrow up to £50,000 at a favorable interest rate of 2.5% for up to 6 years can significantly aid in stabilizing these businesses, promoting consumption and investment. This, in turn, can contribute significantly to the economy by helping create jobs and increasing overall economic productivity.
Step 2
Which one of the following would be a risk if only minimal checks were made on borrowers’ in this loan scheme?
Answer
The correct answer is A) Asymmetric information. This refers to a situation where one party in a transaction has more or better information than the other. In the context of the loan scheme, if minimal checks are conducted on borrowers, lenders may not accurately assess the creditworthiness or ability of borrowers to repay the loans. This asymmetry can lead to higher risks of defaults on loans, as irresponsible borrowers who may not be able to repay could easily access the funds.