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Policy Instruments (A2)

Financial stability

  • 3 things to know
  • A2 Units 3 and 4

Overview

Recall questions on financial stability.

What you need to know

Answer each one before you reveal it.

Your recallNot started
Key term

Name two types of risk management services provided by the UK financial sector.

Key term

What is systemic risk and how can it harm the real economy?

Key term

Why might excessive risk-taking by financial institutions impose costs on taxpayers?

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    How does the UK's large financial sector support business investment and household spending?

    Model answer

    By providing credit to businesses and households, the financial sector facilitates investment and consumption in the real economy.

  2. 2

    In what way does the financial sector contribute to economic efficiency in capital markets?

    Model answer

    It enables the efficient allocation of capital to its most productive uses, directing funds to where they generate the highest returns.

  3. 3

    What direct contributions does the UK financial sector make to government finances and the labour market?

    Model answer

    It generates employment and contributes significant tax revenue to the government.

  4. 4

    Name two types of risk management services provided by the UK financial sector.

    Model answer

    Insurance and hedging instruments.

  5. 5

    How might a large financial sector create a misallocation of human capital in the economy?

    Model answer

    It may divert skilled labour and resources away from other productive sectors of the economy.

  6. 6

    What is systemic risk and how can it harm the real economy?

    Model answer

    Systemic risk is the danger that instability in the financial system spreads throughout the economy, potentially triggering recessions that reduce output and employment.

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