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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 by facilitating the exchange of funds between lenders and borrowers. One primary role is to lend to businesses and individuals, which helps them consume and invest. In the context of the loan scheme mentioned, financial markets provide necessary financing to small businesses, allowing them to survive economic downturns by accessing loans with favorable terms. This can result in stimulating economic activity as businesses utilize funds to invest in operations or expansion, thereby potentially increasing consumption and overall economic growth.
Step 2
Which one of the following would be a risk if only minimal checks were made on borrowers’ in this loan scheme?
Answer
A. Asymmetric information - This refers to a situation where one party in a transaction has more or better information than the other. In this loan scheme, minimal checks on borrowers could lead to lenders being unaware of the borrowers' creditworthiness, increasing the risk of lending to unqualified applicants. This could ultimately lead to higher default rates.