1. 4.4. The financial sector summary
4.4.1 Role of financial markets (see 1.1.5)
4.4.2 Market failure in the financial sector (see 1.3)
4.4.3 Role of central banks

2. 4.4.1 Role of financial markets unit content
Students should be able to:
Explain the role of financial markets:
to facilitate saving
to lend to businesses and individuals
to facilitate the exchange of goods and services
to provide forward markets in currencies and commodities
to provide a market for equities

3. 1.1.5 What are the functions of money?
Microeconomics Topic 1: The Economic Problem
1.1.5 What are the functions of money?
A m______ of e________ used in payment for goods and services (rather than barter)
A m__________ of v_______: used to compare goods and to draw up accounts
A s________ of v______: money holds its value (unless we have very high inflation) and so is acceptable to buyers and sellers
A m________ of d_________ p________: e.g. when using credit to purchase goods
June 2011

4. Money and the Bank of England
Topic 9: aggregate demand and aggregate supply
Money and the Bank of England
How many years (approx.) has the Bank of England been issuing bank notes?
What gives paper notes their value?
How do the Bank of England make it hard for people to produce counterfeit money?

5. Who can lend money to individuals and businesses?
RESEARCH – Tuesday 14th
Who can lend money to individuals and businesses?
What are retail banks? Commercial banks? Investment banks?
What are “forward markets” in currencies and commodities?
What are equities? Corporate bonds? Gilts?
What are money markets? Capital markets? Foreign exchange markets? Commodity markets? Derivatives markets? Insurance markets?

6. Summary Thursday 16th
Using the syllabus and your notes, create a mind map or summary of Hand this in next lesson

7. 4.4.2 Market failure in the financial sector: content
Students should be able to:
Define market failure
Explain asymmetric information; externalities; moral hazard; speculation and market bubbles; market rigging
AS Theme 1 slides on Market Failure 1.3.

8. The result is a loss of e_________ and s______ welfare.
4.4.2 Market failure
What is market failure?
The result is a loss of e_________ and s______ welfare.
What is economic welfare?

9. 4.4.2 Asymmetric information and externalities
What is asymmetric information?
What are externalities?

10. 4.4.2 Moral hazard
What is moral hazard?

11. 4.4.2 Speculation and market bubbles
What is speculation and market bubbles?
Speculation is
Market bubbles occur when the

12. 4.4.2 Market rigging
What is market rigging?.

13. 4.4.2 Examples of market failure
Find examples of the different types of market failure discussed
E.g. the South Sea Bubble; PPI; securitisation of mortgages in the USA; Wall Street Crash etc.

14. Research the causes of financial market failure
Asymmetric information
Externalities
Moral hazard (include the government’s implicit guarantee)
Speculation and market bubbles (include CDOs)
Market rigging (use for more information, what happened in November 2014)

15. Research LIBOR
BBC News Business, 18 December – what is LIBOR? Why does it matter? What was the LIBOR rate- fixing scandal? What happened?

16. Research the causes of the financial crisis
What were the causes of the financial crisis?
Group the causes into failures in the financial sector and failures in regulation

17. Students should be able to:
4.4.3 Role of central banks
Students should be able to:
Explain the key functions of central banks:
implementation of monetary policy
banker to the government
banker to the banks – lender of last resort
role in regulation of the banking industry

18. _________________________________ is the central bank for the UK
Names of central banks
_________________________________ is the central bank for the UK
The _____________________________ is the central bank for the USA
The ________________________ is the central bank for the Eurozone countries
The _______________________: Japan
The ________________________: China

19. 4.4.3 What do central banks do?
Act as b__________ to the banks: lender of last r__________
Act as banker to the g_______________
Implement m_________ policy (see 2.6.2)
Issue notes and c___________
Manage e___________ rates and the g______ and foreign currency reserves of the country (see 4.1.8)
Regulate the f_______________ industry

20. 4.4.3 What is the link between Iender of last resort and moral hazard?

21. 4.4.3 Why is financial regulation needed?

22. 4.4.3 Shadow banking and regulatory capture
What is shadow banking?
What is regulatory capture?

23. 4.4.3 Type of regulation
Financial institutions must follow various rules and may be fined if they break them. E.g.
Financial institutions may be compelled to have enough reserves to cover any ___________ they make.

24. 4.4.3 Research banking regulation
Write a brief summary of banking regulation in the UK from the 1970s.
What were the three bodies responsible for financial regulation which were created by the 2012 Financial Services Act?