LC Economics: The finance sector

Demand for credit

• future expectations

• the interest rate

• government incentives

Fractional reserve banking

banks accept deposits from costumers and know that only 10% of deposits are required by depositors at any one time.

reserve ratio

the percentage of deposits a financial institution must keep in cash form

positive implications of a bank being able to create credit

• increased national income

• increased employment

• increased gov. tax/revenue

• increased investment

negative implications of banks ability to create credit

• poor lending decisions

• inflation ex. increased demand, increased price

• increased imports- less purchasing irish

• overdependence on credit

factors that determine low interest rates

• cost of credit falls

• demand for credit rises

• consumer spending+ investing rises

• levels of savings fall

• inflation rises

factors that determine high interest rates

• cost of credit rises

• demand for credit falls

• consumer spending and investment fall

• levels of savings rise

• aggregate demand in economy falls

• inflation falls

why do financial institutions need to be regulated?

• to protect depositors ex. confidence in the financial system

• to protect borrowers

• prevent reckless spending ex. mortgage must be max 3.5 size of income

• to protect taxpayers ex. the bailout of 2008

role of Irish central bank

• maintains price stability e.g implements monetary policy aims for 2% inflation rate

• lender of last resort

• banker to the gov.

• implements monetary policy

• advice i.e bulletin

• bank regulation

• stability of the financial system e.g bank regs