Several commercial banks operating in one region suffered substantial losses. The table shows changes in the region over the following year.
| Indicator | Before the losses | Following year |
|---|---|---|
| Household deposits at commercial banks at year end (£bn) | 24.0 | 26.0 |
| Household purchases financed by new bank loans (£bn) | 1.20 | 0.90 |
| New bank loans approved for producers (£bn) | 1.50 | 0.95 |
| Producer spending on machinery and buildings (£bn) | 2.10 | 1.55 |
| Government tax receipts from financial-sector firms (£bn) | 1.10 | 0.82 |
Which conclusion best accounts for all the changes shown?
Although deposits increased, the sector channelled less finance to borrowers; this constrained household purchases and producer investment, while bank losses were associated with lower government tax receipts.
The banks' losses mainly weakened money's unit-of-account function, making it harder to compare prices and causing household purchases, producer investment and tax receipts to fall.
The fall in tax receipts reduced the funds available for commercial banks to lend, so declining government revenue caused the reductions in household borrowing and producer investment.
The rise in deposits shows that banks had more savings available to lend, so the falls in household purchases, producer investment and tax receipts were not caused by the financial sector.
82 exam-style questions on OCR GCSE Economics 2.8 The role of money and financial markets, covering 2.8.1 Money as a medium of exchange, 2.8.2 Role of the financial sector, 2.8.3 Importance of the financial sector, 2.8.4 Interest rates and saving, borrowing, investment, and 2.8.5 Effect of interest rate changes. Each one has a worked solution and a mark scheme showing where the marks go.