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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 in lending to businesses and individuals to help them consume and invest. In the context of the loan scheme, financial markets facilitate the exchange of funds between savers and borrowers. This scheme assists small businesses to access significant loans quickly, which can be vital in times of economic downturn. Moreover, by providing forward financing, these markets enable firms to reduce risks associated with fluctuating prices and uncertainties in the economic landscape.
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 is the correct answer. Minimal checks could lead to situations where lenders are unaware of the borrower's creditworthiness, resulting in poor lending decisions.