The role of money and financial markets: Practice Questions

In economics, what is the main role of money when it is used to buy and sell goods and services?

If the central bank decides to increase interest rates from \(2\%\) to \(4\%\), what is the most likely effect on consumer behavior?

A firm plans an investment project costing \(£200,000\) using a bank loan. If the interest rate rises from \(5\%\) to \(8\%\) per annum, what is the increase in the annual interest cost for the firm?

A consumer has \(£5,000\) in a savings account. At the start of the year, the interest rate is \(2\%\) per annum. Six months into the year, the bank increases the interest rate to \(4\%\) per annum.

Assuming interest is calculated on the principal amount and no further deposits or withdrawals are made, what is the total amount of interest earned by the consumer at the end of one year?

In the financial sector, certain institutions are specifically known for being owned by their members and primarily offering mortgage lending and savings accounts.

Which type of financial institution best fits this description, and how would an increase in interest rates typically affect its volume of new lending?

Explain how a decrease in interest rates set by the central bank might affect the level of investment by firms.

The central bank decides to increase the base interest rate from \(1\%\) to \(4\%\).
a) Calculate the extra annual interest paid on a loan of \(£15,000\) due to this change.
b) Analyze the likely impact of this increase on the levels of saving and borrowing for a typical household.
c) Evaluate the importance of the financial sector for producers in the economy.