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(a) (i) Outline three factors that limit the ability of banks to create credit - Leaving Cert Economics - Question 5 - 2015
Question 5
(a) (i) Outline three factors that limit the ability of banks to create credit. (ii) Discuss the economic reasons why the financial system in Ireland should be regu... show full transcript
Worked Solution & Example Answer:(a) (i) Outline three factors that limit the ability of banks to create credit - Leaving Cert Economics - Question 5 - 2015
Step 1
Outline three factors that limit the ability of banks to create credit.
Answer
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Availability of creditworthy customers: Banks are cautious in lending as they need to ensure borrowers can repay loans.
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Cash deposits to the banks: Banks require substantial cash deposits which limit their ability to create new credit.
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Demand for loans / credit by customers: Low demand for loans can lead banks to limit credit creation, especially in uncertain economic times.
Step 2
Discuss the economic reasons why the financial system in Ireland should be regulated.
Answer
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To provide a degree of protection: Regulation helps safeguard consumers and ensures financial institutions operate in a sound manner.
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To ensure proper lending procedures: Regulations minimize reckless lending, thereby creating a more stable banking environment.
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To maintain the stability of the financial system: Effective regulation can restore confidence in the financial sector and contribute to overall economic growth.
Step 3
State and explain the possible economic impacts of these restrictions on the Irish property market.
Answer
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Could create a restriction on the supply of properties: By limiting borrowing, potential buyers may be unable to purchase homes, dampening demand.
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Potential supply effect on rental properties: Reduced mortgage lending may lead to an increased demand for rental properties, possibly raising rental prices in the short term.
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Could hinder the recovery in the property market: Restrictions may impede potential buyers from entering the market, resulting in stagnation in housing sales.
Step 4
Discuss the possible economic benefits of increased access to funding for the SME sector in Ireland.
Answer
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Create job / training opportunities: Increased access to funding facilitates the growth of SMEs, leading to job creation and training opportunities, effectively reducing unemployment.
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Encourage entrepreneurship: Easier access to finance stimulates innovative ideas and new businesses, boosting economic growth and GDP.
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Flexible response to market changes: SMEs can quickly adapt to market conditions, benefiting local economies by meeting community needs effectively.