4.4

• What are the two sectors described in the Lewis model for developing countries?

  A large, low-productivity agricultural sector and a smaller, high-productivity industrial sector
• How does the Lewis model suggest development occurs in developing countries?

  Development occurs when resources move from the agricultural sector to the industrial sector
• What effect does an increase in industrial sector wages have according to the Lewis model?

  It drives up wages and well-being for the industrial sector
• What are the benefits of developing primary industries?

  • Creates jobs
  • Increases tax revenue
  • Attracts foreign direct investment (FDI)
• Why is the enhancement of human capital important for development?

  It contributes to economic growth
• What role does infrastructure development play in economic growth?

  It is necessary for a higher level of physical production or productivity
• What is a severe form of debt accumulation mentioned in the study material?

  Debt
• What was the original purpose of the World Bank?

  • Provide long-term loans for reconstruction
  • Focus on development
• What is the current focus of the World Bank?

  Promoting poverty reduction across the world
• What criticism is directed at the World Bank's advice?

  It does not always adapt to local economic practices
• What was the original purpose of the International Monetary Fund (IMF)?

  • Provide short-term loans for balance of payment crises
  • Support developing countries
• What do members of the IMF pay to join?

  A fee
• What type of financial support does the IMF provide?

  Money for exchange rate intervention
• What are the main focuses of non-governmental organizations (NGOs)?

  • Promote long-term development
  • Address various social issues
• What are the main elements of the financial market that you need to know?

  The main elements include surplus units, deficit units, and financial institutions
• How do financial markets facilitate saving?

  Households and businesses save money in financial institutions
• How do financial markets enable lending to businesses and individuals?

  Savings by households allow funds to be lent to businesses
• What role do financial markets play in the exchange of goods and services?

  They make the exchange much easier, especially in high-value businesses
• How do transactions occur in financial markets?

  Transactions can occur quickly and easily between households, businesses, employers, and governments
• What payment methods are mentioned for transactions in financial markets?

  Debit cards, credit cards, internet payments, automated transfers, and standing orders
• What is the purpose of forward markets in currencies and commodities?

  They allow businesses to buy currency at a fixed rate on a future date
• Why do firms and households need a market for equities?

  To access finance
• What are some key terms related to market failure in the financial sector?

  Moral hazard, speculation and market bubbles, market rigging, and asymmetric information
• What is the function of monetary policy?

  Managing the money supply
• What are other aspects of monetary policy besides managing the money supply?

  Size of the money supply, level of interest rates, and exchange rate stability
• Who sets monetary policy in the UK?

  The Bank of England
• What is the primary target of the Bank of England's monetary policy?

  To keep inflation at 2% per year
• How is the inflation target achieved according to the Bank of England?

  Through changes in the bank rate (base rate)
• Who decides the bank rate in the UK?

  The Monetary Policy Committee (MPC)
• What are the other objectives of the Bank of England's monetary policy?

  • Full employment
  • Steady economic growth
• What role does the Bank of England play as a banker to the government?

  Acts as the bank to the government and performs roles through the Debt Management Office
• What does the Bank of England do as a lender of last resort?

  Provides money for financial institutions that cannot gain money elsewhere
• What was the state of regulation in the financial system until the 2008 financial crisis?

  Regulation was limited
• What did the limited regulation contribute to during the financial crisis?

  It magnified the financial crisis
• What did the Financial Services Act 2012 introduce?

  • A regulatory framework to improve financial stability
  • Spread across the UK
• What do liquidity ratios ensure for banks?

  That banks hold sufficient liquidity in times of stress
• What do capital ratios limit for banks?

  Limit banks’ lending to a percentage of the bank’s own permanent capital
• What was introduced for UK banks in 2009 regarding capital requirements?

  The Liquidity Coverage Ratio
• What are some issues with regulation in the financial sector?

  Financial crises affect the whole banking sector and reduce credit availability
• How can tight regulation affect borrowing choices?

  It reduces people's choices of borrowing