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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 the economy by providing funds to businesses and individuals, which facilitates economic activities. Specifically, one role of financial markets is to lend to businesses and individuals to help them consume or invest. The UK government’s loan scheme is an example of how financial markets can provide vital funding needed for businesses to survive an economic downturn. For instance, the loan allows businesses to maintain operations and avoid insolvency by providing necessary capital. Furthermore, financial markets can act as platforms for exchanging goods and services, increasing consumption and investment. In this context, the availability of loans supports firms in expanding their operations and mitigating economic impacts.
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. In the context of financial markets, asymmetric information occurs when one party has more or better information than the other. If only minimal checks are conducted, lenders may not have enough information about the borrower's creditworthiness, which can lead to higher risks of default. This could potentially result in loans being granted to borrowers who may not have the ability to repay them, undermining the stability of the financial system.