Question? Discussion points pg 89

Uncertainty Businesses dislike uncertainty, it makes planning difficult and can effect investment decisions This is different to risk, risks arise when changes are expected, the probability of these risks can be calculated with some degree of certainty based on past data Shocks however are unpredictable and can often have a significant effect on the economy e.g. 9/11, Oil crisis 1973

Planning for risk??? Q – How can businesses plan for risk happening?? Tip How can an importer or exporter plan for exchange rate changes? How can a shipping company plan for one of their ships sinking?

Planning for Risk Summarise forward markets and role of insurance pg92

The role of the Financial Sector Discussion point pg 94

The role of the financial sector Credit creation Using money from savings and current accounts to lend to individuals and businesses Must ensure there are robust credit checks in place To facilitate exchange – money is the medium of exchange To provide forward currency markets To provide a market for equities (shares in PLCs)

The role of the Central Bank MPC sets in base rate of interest To implement monetary policy to manage inflation To regulate the banking industry Banker to the banks – lender of last resort

The global financial crisis Discussion points pg 104

Contributing factors Sub-prime mortgages – risky mortgages to people with poor credit history Moral hazard – banks acting in self interest and knowing others will have to deal with the problem if it goes wrong Collapse of lending to businesses Speculation of potential bank failure

Banking regulation Ultimately the banks are regulated by the BofE Also have the Financial Conduct Authority which monitors the integrity for the sector Not part of the BofE but reports directly to the treasury And the Prudential Regulation Authority which supervises both retail and investment banks Is a part of the BofE

Importance of financial sector Finance is the blood of business Without finance businesses cannot grow Without finance households cannot borrow A weak financial sector will also of course lead to a reduction in confidence All of which will lead to falling output and demand So although regulation is costly it is essential to maintain a healthy financial sector