1.4.1 role of banks in the economy

How do banks channel savings towards investment?

By manipulating interest rates to discourage saving and encourage borrowing

How do low interest rates affect saving?

They reduce the reward for saving

How does inflation higher than interest rates affect savings?

The real value of savings falls, discouraging saving

Why do low interest rates encourage investment?

Borrowing becomes cheaper, encouraging spending and investment

What is the main source of income for commercial banks?

Interest earned from loans

How do banks create credit?

By using deposited funds to provide loans

What is a secured loan?

A loan backed by an asset to protect the bank

Give an example of a secured loan

A mortgage secured against a house

What is a cash credit loan?

A loan based on bonds or approved securities with flexible withdrawals

What is a loan on demand?

A loan paid in full to the borrower’s account and charged interest immediately

What are short-term loans usually used for?

Personal use or working capital

What are short-term loans usually secured against?

An asset or security

What is a central bank?

An institution that manages a country’s currency, money supply, and interest rates

Examples of central banks

Bank of England, European Central Bank, People’s Bank of China

What is monetary policy?

Actions taken by the central bank to influence interest rates, money supply, and credit

What does the central bank use monetary policy for?

To control inflation and maintain price stability

What is the Monetary Policy Committee (MPC)?

A group that sets interest rates in the UK

How many members are in the MPC?

Nine

How often does the MPC meet?

Monthly

Is the MPC independent from the government?

Yes

What is the base rate?

The interest rate set by the central bank that influences all other interest rates

Why is the base rate important?

It affects borrowing costs and rewards for saving across the economy

What is collateral?

An asset pledged as security for a loan

Give an example of collateral

Property used as security for a mortgage

What is a mortgage?

A loan taken out to buy a house

How is a mortgage secured?

Against the property being purchased

What happens if a mortgage is not repaid?

The bank can repossess the house

How long do mortgages usually last?

Around 25 years

How are mortgages usually repaid?

Monthly payments