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Lecture notes Unit 4 - Making markets work £7.49
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  2.  
  3. PEARSON (PEARSON)
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  5. Economics B
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  7. Unit 4 - Making markets work

Lecture notes

Lecture notes Unit 4 - Making markets work

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These notes helped me get an A* in A Level Economics, covering all aspects of the specification, plus hints of real world context.

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  • June 15, 2023
  • 2
  • 2022/2023
  • Lecture notes
  • Paddingtion zinzombe
  • All classes

Subjects

  • 411 spectrum of competition 412 barriers to e

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4.5.4 The global financial crisis

 Decline of worlds GDP
 Before asset prices were high
 Boom in economic demand
 Risky bank loans and mortgages
 Backed by subprime mortgages
 Borrowers with poor credit histories allowed mortgages
 Housing prices crashed and people defaulted on their mortgages
 Banks had insufficient funds
 After the UK used expansionary fiscal policy
 VAT cut from 17.5% to 15%
 Government received less tax revenue die to recession
 Increased government borrowing
 Global recession started spreading and interest rates cut further
 No confidence in economy so did not spend
 Interest rates cut to 0.5% in March 2009
 Initially £75bn was injected now £375bn
 UK had low inflation

Contributing Factors

 Subprime mortgages
o Risky bank loans and mortgages
o Government securities backed by subprime mortgages
o Means that borrowers had poor credit histories
o Asymmetric information as banks did not know how risky the loans were
o Banks make sure you can afford to pay back your loan
 Moral hazard
o There is a risk that the borrower does the things that the lender would not deem
desirable
o Makes the borrower less likely to repay the loan
o Usually occurs when there is some form of insurance for the mistake
o Banks may take risks if they know the BoE will bail them out
o Systematic risk can be seen as a negative externality.
 Speculation & market bubbles
o Occurs when a price of an asset is predicated to rise significantly
o Causes it to be traded more, demand exceeds supply
o Price rises beyond intrinsic value
o The bubble burst when the price steeply falls to original level
o Causes panic and investors try to sell their assets
o Loss of confidence leads to economic decline or a depression
 Role of banking regulation
o Government might regulate banks with regulation & guidelines
o Ensure their behaviour is clear

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