1.4 role of credit in the economy

• how do banks encourage/discourage saving and investing

  they manipulate interest rates, so high interest rates encourage savings and discourage investing
• what is a banks main source of profit, and how do they earn this

  is interest rates, which they earn through loans
• role of a central bank

  to manipulate interest rates, the exchange rate and the money supply
• name the rate that central banks control, which determines overall interest rates

  the base rate
• what is the Monetary Policy Committee (MPC) and what do they do

  group of 9 members, independent of the government, who meet frequently to discuss future interest rate changes
• define risk

  probability of damage, loss or injury occurring
• how do banks face risk

  when they lend money, as there is the possibility of that debt not being repaid
• difference between limited and unlimited liability

  UNLIMITED: the owner of the firm at risk of their own assets being repossessed to meet their financial obligations

  LIMITED: results in the owner only having to pay back what they invested in the firm
• 3 different types of credit

  • loans
  • overdraft
  • trade credit
• trade credit

  loan to a firm given by its suppliers, so the goods can be bought immediately and paid for at a later date
• pros and cons of overdrafts

  PROS: the interest is only paid on the money borrowed

  CONS:

  • interest rates are very high
  • amount you can borrow is limited
• 4 examples of sources of credit

  • banks
  • venture capital
  • share capital
  • leasing
• venture capital

  when a specialist firm provides funding in return for a share of the company
• major benefit of using personal savings to finance ventures

  no interest paid, because the money is yours
• retained profit

  money left after taxes and other fees have been deducted
• in what scenario would it wise for a firm to sell its asset to finance operations

  when the assets in question are no longer used or obsolete
• where is collaborative funding usually conducted

  on the internet
• why would it be more expensive for small firms to access credit than larger firms

  it takes time for small firms to build a strong credit history, so they must pay higher interest rates