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transactions involving financial claims or assets."},{"text":"financial assets and liabilities","correct":false,"explanation":"Financial assets and liabilities are claims and obligations within the financial economy. The real economy instead involves producing, buying and selling actual goods and services."},{"text":"shares, bonds and currencies","correct":false,"explanation":"Shares, bonds and currencies are traded in financial markets rather than product markets. The real economy concerns the production and exchange of actual goods and services."},{"text":"loans, savings and mortgages","correct":false,"explanation":"Loans, savings and mortgages are financial products connecting savers and borrowers. The real economy instead consists of producing, buying and selling actual goods and services."}]},{"id":"876a903f-5624-431a-893a-401545c6803f","cardType":"basic","points":1,"front":"What does the financial sector do for savers and borrowers?","back":"Channels spare funds to borrowing, investment and risk management.","mcqOptions":[{"text":"Channels spare funds to borrowing, investment and risk management.","correct":true,"explanation":"Financial institutions connect savers with households and firms needing finance, directing otherwise unused funds towards borrowing, productive investment and methods of managing financial risk."},{"text":"Channels tax revenues to public spending, welfare and income redistribution.","correct":false,"explanation":"Channelling taxation into government expenditure is a fiscal function of the state. The financial sector channels savers’ spare funds towards borrowing, investment and risk management."},{"text":"Fixes market prices for borrowing, investment and all financial risks.","correct":false,"explanation":"Financial markets help determine prices through supply and demand, but the sector does not fix them. Its key role is channelling spare funds to borrowers and investors."},{"text":"Prevents fund transfers between savers, borrowers and investors.","correct":false,"explanation":"This reverses the financial sector’s role: institutions facilitate rather than prevent transfers. They channel spare funds from savers towards borrowing, investment and risk management."}]},{"id":"2f6bb1c5-7937-47e1-a681-825f2b69c21d","cardType":"basic","points":1,"front":"Which 1986 reforms increased competition in the City of London?","back":"The Big Bang reforms.","mcqOptions":[{"text":"The Big Bang reforms.","correct":true,"explanation":"The 1986 Big Bang deregulated London’s financial markets, including ending fixed commissions and allowing greater outside ownership, which substantially increased competition in the City."},{"text":"The Basel reforms.","correct":false,"explanation":"Basel agreements established international bank capital and regulatory standards; they were not the 1986 City reforms. The competition-enhancing changes were the Big Bang reforms."},{"text":"The Bretton Woods reforms.","correct":false,"explanation":"Bretton Woods created the post-war international monetary system in 1944, not the 1986 City reforms. The relevant deregulation was known as the Big Bang."},{"text":"The Big Four reforms.","correct":false,"explanation":"The Big Four refers to the largest accountancy firms, not a set of 1986 financial reforms. The City’s competition-enhancing reforms were called the Big Bang."}]},{"id":"33a3c2f6-49d8-452d-99f2-a0ab3c89af3d","cardType":"cloze","points":null,"front":"Financial stability means banks, markets and payment systems can [ ] during economic [ ].","back":"Financial stability means banks, markets and payment systems can keep functioning during economic shocks.","mcqOptions":[{"text":"Financial stability means banks, markets and payment systems can keep functioning during economic shocks.","correct":true,"explanation":"A stable financial system continues providing essential services, such as lending and payments, when adverse economic shocks place institutions and markets under pressure."},{"text":"Financial stability means banks, markets and payment systems can stop functioning during economic shocks.","correct":false,"explanation":"Stopping during a shock describes financial instability and disruption. Stability means banks, markets and payment systems can keep functioning despite economic shocks."},{"text":"Financial stability means banks, markets and payment systems can keep functioning during economic booms.","correct":false,"explanation":"Functioning during favourable booms does not demonstrate resilience. Financial stability specifically requires banks, markets and payment systems to keep operating when economic shocks occur."},{"text":"Financial stability means banks, markets and payment systems can raise interest rates during economic shocks.","correct":false,"explanation":"Raising interest rates is a monetary policy decision, not the definition of financial stability. Stability means the financial system can keep functioning during economic shocks."}]},{"id":"e175bbdf-9c63-43c6-ae77-0031e2d9ae84","cardType":"basic","points":1,"front":"What happens in a credit crunch?","back":"Banks reduce lending sharply due to feared losses or lack of funds.","mcqOptions":[{"text":"Banks reduce lending sharply due to feared losses or lack of funds.","correct":true,"explanation":"A credit crunch occurs when banks become unwilling or unable to provide normal amounts of credit, often because they expect loan losses or face funding difficulties."},{"text":"Banks increase lending sharply due to rising confidence and abundant funds.","correct":false,"explanation":"Increased lending from confidence and abundant funds describes a credit expansion rather than a crunch. During a credit crunch, banks sharply reduce lending because of losses or funding shortages."},{"text":"Banks reduce deposit rates sharply due to feared inflation or excess funds.","correct":false,"explanation":"A change in deposit rates is not itself a credit crunch. A crunch occurs when banks sharply restrict lending because they fear losses or lack available funds."},{"text":"Borrowers repay loans rapidly due to lower interest rates or rising incomes.","correct":false,"explanation":"Faster repayment by borrowers does not define a credit crunch. The defining feature is a sharp reduction in bank lending caused by feared losses or insufficient funding."}]},{"id":"13f4e26d-6137-4f58-b9e8-6672613ea1f1","cardType":"cloze","points":null,"front":"[ ] is how easily an asset can become cash without a large loss in value.","back":"Liquidity is how easily an asset can become cash without a large loss in value.","mcqOptions":[{"text":"Liquidity","correct":true,"explanation":"Liquidity measures how quickly and easily an asset can be converted into cash without requiring a substantial reduction in its market value."},{"text":"Profitability","correct":false,"explanation":"Profitability measures the ability to generate profit, not the ease of conversion into cash. Liquidity describes how readily an asset can become cash without losing much value."},{"text":"Solvency","correct":false,"explanation":"Solvency concerns whether total assets exceed total liabilities and debts can ultimately be paid. Liquidity concerns converting an asset into cash quickly without a large loss."},{"text":"Leverage","correct":false,"explanation":"Leverage measures the extent to which an investment or institution is financed using borrowed money. Liquidity measures how easily an asset can become cash without substantial loss."}]},{"id":"f2211dd3-228d-49b4-80bc-128c680a0f27","cardType":"cloze","points":null,"front":"[ ] means assets are greater than liabilities, so debts can ultimately be paid.","back":"Solvency means assets are greater than liabilities, so debts can ultimately be paid.","mcqOptions":[{"text":"Solvency","correct":true,"explanation":"A solvent institution has assets worth more than its liabilities, giving it sufficient overall resources to meet its debts ultimately, even if some assets are illiquid."},{"text":"Liquidity","correct":false,"explanation":"Liquidity is the ability to obtain cash quickly and meet immediate payments, even if total liabilities exceed assets. Solvency means assets exceed liabilities overall."},{"text":"Profitability","correct":false,"explanation":"Profitability means earning more revenue than costs over a period, but a profitable firm may still have excessive liabilities. Assets exceeding liabilities describes solvency."},{"text":"Capital adequacy","correct":false,"explanation":"Capital adequacy concerns whether a bank holds enough regulatory capital relative to its risk-weighted assets. Solvency more generally means assets are greater than liabilities."}]},{"id":"eb884442-9535-4c2c-8c29-da536559483e","cardType":"basic","points":2,"front":"How does leverage increase financial risk?","back":"Borrowed money increases exposure to gains and losses.","mcqOptions":[{"text":"Borrowed money increases exposure to gains and losses.","correct":true,"explanation":"Debt allows a larger position to be controlled with less equity, so changes in asset values produce proportionally larger gains or losses for the owners."},{"text":"Cash reserves increase exposure to gains and losses.","correct":false,"explanation":"Holding cash reserves generally improves liquidity and may reduce financial vulnerability; it is not leverage. Borrowed money creates leverage and magnifies exposure to both gains and losses."},{"text":"Shareholder dividends increase exposure to gains and losses.","correct":false,"explanation":"Dividends distribute profits to shareholders and do not create leverage. Leverage arises from borrowed money, which magnifies the gains and losses experienced by equity holders."},{"text":"Insurance premiums increase exposure to gains and losses.","correct":false,"explanation":"Insurance premiums purchase protection against specified risks rather than creating leverage. Borrowed money increases exposure because debt magnifies returns and losses relative to the owner’s equity."}]},{"id":"ce40b400-6b94-4171-8c56-ba2145f6e978","cardType":"basic","points":1,"front":"If one institution's problems spread across the whole financial system, what is this?","back":"Systemic risk.","mcqOptions":[{"text":"Systemic risk.","correct":true,"explanation":"Systemic risk occurs when problems at one financial institution or market spread through interconnected institutions, threatening the stability of the financial system as a whole."},{"text":"Liquidity risk.","correct":false,"explanation":"Liquidity risk is the danger of being unable to meet short-term payment demands, but it does not necessarily spread throughout the entire financial system. The correct term is systemic risk."},{"text":"Credit risk.","correct":false,"explanation":"Credit risk is the possibility that a borrower will default, affecting the lender’s assets. It becomes systemic risk only when such problems spread across the wider financial system."},{"text":"Operational risk.","correct":false,"explanation":"Operational risk comes from failures in systems, processes or staff within an organisation. The financial-system-wide transmission of problems is specifically called systemic risk."}]},{"id":"3e9bdca5-215b-4fd5-96e0-4c1321856419","cardType":"basic","points":2,"front":"Why does maturity transformation make banks vulnerable to panic?","back":"Short-term deposits fund long-term loans, so mass withdrawals create pressure.","mcqOptions":[{"text":"Short-term deposits fund long-term loans, so mass withdrawals create pressure.","correct":true,"explanation":"Banks use deposits that may be withdrawn quickly to finance loans that are repaid over years. If many depositors withdraw simultaneously, the bank may struggle to provide cash."},{"text":"Long-term deposits fund short-term loans, so mass withdrawals create pressure.","correct":false,"explanation":"This reverses maturity transformation: banks generally fund longer-term lending with shorter-term deposits. That mismatch, rather than long-term deposits funding short-term loans, creates panic vulnerability."},{"text":"Short-term deposits fund short-term loans, so mass withdrawals create pressure.","correct":false,"explanation":"Matching short-term deposits with short-term loans would reduce the maturity mismatch. Banks become vulnerable because short-term deposits help finance loans that mature much later."},{"text":"Long-term deposits fund long-term loans, so mass withdrawals create pressure.","correct":false,"explanation":"Long-term deposits would normally remain invested for longer, so sudden withdrawals would be less of a maturity problem. The vulnerability comes from short-term deposits funding long-term loans."}]},{"id":"3a961b6c-05a8-40fc-a553-60d1a8633afd","cardType":"cloze","points":null,"front":"An asset bubble occurs when asset prices rise far above [ ], driven by expected later [ ].","back":"An asset bubble occurs when asset prices rise far above fundamental value, driven by expected later capital gains.","mcqOptions":[{"text":"An asset bubble occurs when asset prices rise far above fundamental value, driven by expected later capital gains.","correct":true,"explanation":"An asset bubble involves prices becoming detached from fundamental value, which reflects expected income or usefulness. Buyers are encouraged by the belief that they can later sell at a capital gain."},{"text":"An asset bubble occurs when asset prices rise far above market value, driven by expected later capital gains.","correct":false,"explanation":"Market value is the price currently established by buyers and sellers, so prices cannot meaningfully rise above it in this definition. The relevant benchmark is fundamental value."},{"text":"An asset bubble occurs when asset prices rise far above fundamental value, driven by expected later dividend payments.","correct":false,"explanation":"Dividend payments are one possible source of an asset’s fundamental income, but bubble demand is driven by expected resale profits more generally. The correct term is capital gains."},{"text":"An asset bubble occurs when asset prices rise far above production cost, driven by expected later interest payments.","correct":false,"explanation":"Production cost is not the key valuation benchmark for most financial assets, and interest payments are not the general reason buyers expect prices to rise. The terms are fundamental value and capital gains."}]},{"id":"5cd92792-0624-48ba-a0ec-86b79ef0f95f","cardType":"basic","points":1,"front":"What determines an asset's fundamental value?","back":"Expected future income or usefulness, such as rents or profits.","mcqOptions":[{"text":"Expected future income or usefulness, such as rents or profits.","correct":true,"explanation":"Fundamental value is based on the economic benefits an asset is expected to provide, including future rents, profits or usefulness, rather than speculative resale-price expectations."},{"text":"Current market price or popularity, such as trading volume or demand.","correct":false,"explanation":"Market price and popularity can be influenced by speculation and may depart from underlying worth. Fundamental value instead reflects expected future income or usefulness, such as rents or profits."},{"text":"Original purchase cost or age, such as the price paid or years owned.","correct":false,"explanation":"An asset’s purchase cost and age do not directly determine the future benefits it provides. Fundamental value depends on expected future income or usefulness."},{"text":"Amount of borrowing or collateral, such as the loan secured against it.","correct":false,"explanation":"Borrowing and collateral affect financing conditions, not the asset’s underlying economic benefits. Fundamental value is determined by expected future income or usefulness, such as rents or profits."}]},{"id":"5528b301-a0a8-4b03-ab67-4a00ba5c3399","cardType":"basic","points":1,"front":"What credit condition often helps start an asset bubble?","back":"Low interest rates or easy credit.","mcqOptions":[{"text":"Low interest rates or easy credit.","correct":true,"explanation":"Low interest rates reduce borrowing costs and easy credit makes finance more available. Both can increase demand for assets and help prices rise beyond their fundamental value."},{"text":"High interest rates or restricted credit.","correct":false,"explanation":"Expensive borrowing and restricted credit usually reduce asset demand, making a bubble less likely to begin. The typical initiating condition is low interest rates or easy credit."},{"text":"Stable interest rates or balanced credit.","correct":false,"explanation":"Stable rates and balanced credit do not necessarily create a surge in borrowing or asset demand. Bubbles are often helped by unusually low interest rates or unusually easy credit."},{"text":"Low inflation or strong currency.","correct":false,"explanation":"Low inflation and a strong currency may affect the wider economy, but they are not the main credit conditions that initiate an asset bubble. Low interest rates or easy credit are more relevant."}]},{"id":"110b3420-acd5-47c8-978b-6bafff42e4bf","cardType":"basic","points":2,"front":"Why do rising asset prices attract more buyers in a bubble?","back":"Optimism grows as buyers expect further price rises.","mcqOptions":[{"text":"Optimism grows as buyers expect further price rises.","correct":true,"explanation":"Rising prices can create the expectation that prices will continue increasing, encouraging more purchases. This optimism can become self-reinforcing and push asset prices further above fundamental value."},{"text":"Pessimism grows as buyers expect future price falls.","correct":false,"explanation":"Pessimism and expectations of falling prices would discourage purchases rather than attract more buyers. Bubble demand is reinforced when optimism about further price rises grows."},{"text":"Risk aversion grows as buyers prefer safer assets.","correct":false,"explanation":"Greater risk aversion usually shifts investors away from speculative assets, reducing demand for them. Bubble buyers are typically encouraged by growing optimism about future price increases."},{"text":"Uncertainty grows as buyers ignore expected returns.","correct":false,"explanation":"Uncertainty and disregard for returns would not provide a reason for more buyers to enter the market. Rising asset prices attract buyers through optimism about further gains."}]},{"id":"a97671c8-51ac-409e-9f63-44b64b85916a","cardType":"basic","points":2,"front":"How does leverage affect an asset bubble's boom and crash?","back":"

Boom: borrowed money raises demand further.
Crash: losses are magnified.

","mcqOptions":[{"text":"

Boom: borrowed money raises demand further.
Crash: losses are magnified.

","correct":true,"explanation":"Leverage means using borrowed money. During a boom it increases purchasing power and demand, while during a crash debt magnifies the losses suffered by investors."},{"text":"

Boom: borrowed money reduces demand further.
Crash: losses are absorbed.

","correct":false,"explanation":"Borrowing gives buyers more purchasing power, so it tends to increase demand during a boom. Debt also magnifies, rather than absorbs, losses during a crash."},{"text":"

Boom: borrowed money raises demand further.
Crash: losses are eliminated.

","correct":false,"explanation":"Leverage can increase demand during the boom, but borrowed funds do not eliminate losses when prices fall. Debt obligations remain, causing losses to be magnified."},{"text":"

Boom: borrowed money lowers prices.
Crash: losses are magnified.

","correct":false,"explanation":"Leverage can magnify losses during a crash, but increased borrowing power usually raises demand and pushes prices upward during the boom rather than lowering them."}]},{"id":"bee8f532-12a3-4eac-9199-f86f72f7c1f7","cardType":"basic","points":1,"front":"In 2007-08, how did US subprime mortgage risk spread globally?","back":"Subprime mortgages were packaged into complex products sold worldwide.","mcqOptions":[{"text":"Subprime mortgages were packaged into complex products sold worldwide.","correct":true,"explanation":"US subprime mortgages were pooled and transformed into mortgage-backed securities and other complex products. Financial institutions worldwide bought them, spreading exposure to US mortgage defaults."},{"text":"Government bonds were packaged into complex products sold worldwide.","correct":false,"explanation":"Government bonds were not the main source of the 2007-08 mortgage-related contagion. The risk originated in subprime mortgages that were packaged into securities and sold globally."},{"text":"Corporate shares were packaged into complex products sold worldwide.","correct":false,"explanation":"Corporate shares were not the underlying assets that transmitted US subprime mortgage risk. The relevant instruments contained pooled subprime mortgages and were distributed internationally."},{"text":"Foreign currencies were packaged into complex products sold worldwide.","correct":false,"explanation":"Currency products can transmit exchange-rate risk, but they did not cause the specific 2007-08 spread of US mortgage risk. Subprime mortgages were packaged and sold worldwide."}]},{"id":"44f1af6d-8964-4f16-ae41-3850f390e24f","cardType":"basic","points":2,"front":"What happened when US house prices fell in the 2007-08 crisis?","back":"Mortgage defaults rose, causing heavy bank losses.","mcqOptions":[{"text":"Mortgage defaults rose, causing heavy bank losses.","correct":true,"explanation":"Falling house prices pushed some borrowers into negative equity and increased defaults. Banks then suffered losses because repossessed properties were often worth less than the outstanding mortgages."},{"text":"Mortgage defaults fell, causing heavy bank profits.","correct":false,"explanation":"This reverses the actual effects of falling house prices. Mortgage defaults rose as borrowers struggled or entered negative equity, causing banks to incur heavy losses."},{"text":"Mortgage lending rose, causing rapid bank growth.","correct":false,"explanation":"This confuses the pre-crisis credit expansion with the consequences of the crash. Defaults rose and bank losses increased, making banks less willing and able to lend."},{"text":"Mortgage repayments rose, causing higher bank liquidity.","correct":false,"explanation":"Falling property values did not cause borrowers to repay more reliably. Defaults rose, reducing banks’ incoming funds and creating heavy losses rather than improving liquidity."}]},{"id":"a234aaea-aae6-44f5-800f-73b8fcf2143a","cardType":"basic","points":2,"front":"A £200,000 house with a £190,000 mortgage falls 15%. What is the equity?","back":"£20,000 negative equity.","mcqOptions":[{"text":"£20,000 negative equity.","correct":true,"explanation":"A 15% fall reduces the house value from £200,000 to £170,000. Since the mortgage remains £190,000, the owner owes £20,000 more than the property is worth."},{"text":"£10,000 negative equity.","correct":false,"explanation":"This uses the original £10,000 equity without fully accounting for the price fall. The new value is £170,000, leaving £20,000 negative equity against the £190,000 mortgage."},{"text":"£20,000 positive equity.","correct":false,"explanation":"This has the correct size but the wrong sign. The £190,000 mortgage exceeds the house’s new £170,000 value, so equity is negative rather than positive."},{"text":"£30,000 negative equity.","correct":false,"explanation":"This treats the entire £30,000 price fall as negative equity and ignores the initial £10,000 equity. Offsetting that equity leaves £20,000 negative equity."}]},{"id":"a0721b48-fa0b-4672-bf8f-f30cef6a7e20","cardType":"basic","points":3,"front":"Recall the asset-crash-to-recession transmission chain.","back":"Asset price crash → bank losses → credit crunch → lower consumption and investment → lower real GDP and higher unemployment.","mcqOptions":[{"text":"Asset price crash → bank losses → credit crunch → lower consumption and investment → lower real GDP and higher unemployment.","correct":true,"explanation":"An asset crash damages bank balance sheets, restricting credit. Reduced borrowing lowers household consumption and business investment, decreasing aggregate demand, real GDP and employment."},{"text":"Asset price crash → bank profits → credit expansion → higher consumption and investment → higher real GDP and lower unemployment.","correct":false,"explanation":"This reverses the transmission mechanism. An asset crash creates bank losses and a credit crunch, which reduce consumption and investment, lowering real GDP and raising unemployment."},{"text":"Asset price crash → bank losses → credit expansion → higher consumption and investment → lower real GDP and higher unemployment.","correct":false,"explanation":"Bank losses generally weaken banks’ capacity and willingness to lend, producing a credit crunch rather than credit expansion. Consumption and investment consequently fall, reducing real GDP."},{"text":"Asset price crash → bank losses → credit crunch → higher consumption and investment → higher real GDP and lower unemployment.","correct":false,"explanation":"This incorrectly assumes restricted credit raises private spending. A credit crunch makes borrowing harder, so consumption and investment fall, causing lower real GDP and higher unemployment."}]},{"id":"fac1b11f-ba4c-4746-8c95-ce33e6ac58d8","cardType":"cloze","points":null,"front":"Financial regulation uses rules and supervision to make institutions safer, protect consumers and reduce [ ].","back":"Financial regulation uses rules and supervision to make institutions safer, protect consumers and reduce risks to the wider economy.","mcqOptions":[{"text":"risks to the wider economy","correct":true,"explanation":"Financial regulation aims to limit systemic risks because the failure of one institution can spread through interconnected markets and harm output, employment and financial confidence."},{"text":"competition within financial markets","correct":false,"explanation":"Regulation may shape competition, but reducing competition is not the central stability objective. It seeks to reduce risks to the wider economy arising from financial distress."},{"text":"profits earned by bank shareholders","correct":false,"explanation":"Limiting shareholder profits is not the purpose of financial regulation. Its stability role is to reduce risks that unsafe institutional behaviour creates for the wider economy."},{"text":"borrowing by low-risk consumers","correct":false,"explanation":"Safe consumer borrowing is not the risk regulation principally seeks to reduce. Regulation targets risks to the wider economy, including contagion and systemic institutional failure."}]},{"id":"b58da87b-b52c-43aa-869c-bc6560a4f0a2","cardType":"basic","points":2,"front":"Which market failure justifies regulating bank risk-taking?","back":"Negative externality: society bears some collapse costs.","mcqOptions":[{"text":"Negative externality: society bears some collapse costs.","correct":true,"explanation":"Risky bank decisions can impose costs on third parties through unemployment, lost output, taxpayer-funded rescues and contagion. These external costs justify regulation of risk-taking."},{"text":"Positive externality: society gains from collapse costs.","correct":false,"explanation":"A bank collapse imposes harmful spillovers rather than external benefits. Because society bears costs not fully considered by banks, the relevant market failure is a negative externality."},{"text":"Information failure: banks cannot calculate private costs.","correct":false,"explanation":"Banks may face uncertainty, but the core justification here is that collapse costs spill onto taxpayers, workers and other firms. That makes the market failure a negative externality."},{"text":"Public good: society cannot exclude bank shareholders.","correct":false,"explanation":"Bank risk-taking is not regulated because shareholders are non-excludable beneficiaries of a public good. Regulation addresses negative externalities because wider society bears some collapse costs."}]},{"id":"21897d86-a43c-4dfb-bf82-fa829db39285","cardType":"basic","points":3,"front":"How do capital and liquidity requirements each promote stability?","back":"

Capital: absorbs losses before insolvency.
Liquidity: helps meet withdrawals and shocks.

","mcqOptions":[{"text":"

Capital: absorbs losses before insolvency.
Liquidity: helps meet withdrawals and shocks.

","correct":true,"explanation":"Capital provides a buffer when assets lose value, reducing insolvency risk. Liquid assets can be converted into cash quickly, allowing banks to meet withdrawals and short-term shocks."},{"text":"

Capital: funds withdrawals during bank runs.
Liquidity: absorbs losses before insolvency.

","correct":false,"explanation":"This swaps the two functions. Capital primarily absorbs losses before insolvency, while liquidity provides accessible funds for meeting withdrawals and coping with short-term shocks."},{"text":"

Capital: guarantees profits during downturns.
Liquidity: prevents all depositor withdrawals.

","correct":false,"explanation":"Neither requirement guarantees profits or stops withdrawals. Capital cushions losses before insolvency, while liquidity helps banks satisfy withdrawals and withstand funding shocks."},{"text":"

Capital: increases exposure to risky assets.
Liquidity: locks funds into long-term loans.

","correct":false,"explanation":"This reverses their stabilising purpose. Capital reduces vulnerability by absorbing losses, while liquidity requires readily available funds rather than locking resources into illiquid long-term assets."}]},{"id":"d95cd39a-3c77-454d-80dd-1b584eb46f2e","cardType":"basic","points":2,"front":"What is the trade-off from too much financial regulation?","back":"Higher bank costs can reduce lending to firms and buyers.","mcqOptions":[{"text":"Higher bank costs can reduce lending to firms and buyers.","correct":true,"explanation":"Compliance and stronger capital or liquidity requirements can raise banks’ costs. Banks may respond by restricting credit or increasing its price, weakening consumption and investment."},{"text":"Lower bank costs can reduce lending to firms and buyers.","correct":false,"explanation":"Lower costs would normally increase banks’ capacity to lend, not reduce it. The trade-off arises because excessive regulation raises bank costs and may restrict lending."},{"text":"Higher bank profits can reduce lending to firms and buyers.","correct":false,"explanation":"Higher profits generally strengthen banks’ ability to supply credit. The concern is that excessive compliance and funding costs may make lending less available or more expensive."},{"text":"Lower bank liquidity can increase lending to firms and buyers.","correct":false,"explanation":"Lower liquidity makes banks more vulnerable and does not represent the main regulatory trade-off. Excessive regulation can raise bank costs, which may reduce lending to firms and buyers."}]},{"id":"6c60f593-e586-4cae-baa2-58f66dff74ba","cardType":"cloze","points":null,"front":"When banks expect rescue because they are too big to fail, this creates [ ].","back":"When banks expect rescue because they are too big to fail, this creates moral hazard.","mcqOptions":[{"text":"moral hazard","correct":true,"explanation":"Expected rescue weakens the consequences of failure, encouraging banks to take greater risks than they otherwise would. This change in behaviour due to protection is moral hazard."},{"text":"adverse selection","correct":false,"explanation":"Adverse selection arises before a transaction when hidden information attracts riskier participants. Expected rescue instead changes banks’ behaviour after protection is anticipated, creating moral hazard."},{"text":"systemic risk","correct":false,"explanation":"Systemic risk is the danger that financial distress spreads across institutions and markets. The incentive to take extra risks because rescue is expected is moral hazard."},{"text":"regulatory capture","correct":false,"explanation":"Regulatory capture occurs when regulators serve the interests of the industry they oversee. Banks taking greater risks because they expect government rescue demonstrates moral hazard."}]},{"id":"907012d8-2fa6-4230-b649-76b406507611","cardType":"basic","points":2,"front":"When is the UK's large financial sector most beneficial?","back":"When it supports productive lending, exports and risk management.","mcqOptions":[{"text":"When it supports productive lending, exports and risk management.","correct":true,"explanation":"These activities help firms invest, facilitate international trade and allow households and businesses to manage uncertainty, so the financial sector supports sustainable growth in the wider economy."},{"text":"When it prioritises speculative trading, leverage and short-term profits.","correct":false,"explanation":"A focus on speculation and high leverage can increase systemic risk rather than benefit the wider economy. The sector is most beneficial when supporting productive lending, exports and risk management."},{"text":"When it restricts business lending, imports and foreign investment.","correct":false,"explanation":"Restricting finance and international capital flows can reduce investment and economic growth. The sector provides greatest benefit when it enables productive lending, supports exports and manages risk."},{"text":"When it guarantees bank profits, bonuses and market dominance.","correct":false,"explanation":"High profits and bonuses do not necessarily create wider economic benefits and may encourage excessive risk-taking. The sector is most beneficial when it supports productive lending, exports and risk management."}]}]}],"examCountdown":{"examDate":"2027-05-10","paperLabel":"Component 1"},"heading":"Financial stability","title":"Financial stability Flashcards","topbar":{"backHref":"/a-level/economics/eduqas/flashcards"},"topicSidebar":"$L38"}]}],"topicId":"f4934e93-f5b6-5b56-8636-5a7d914d41ce","walled":"$L39"}],"$L3a","$L3b"]