The Financial Sector, 25-Marker (Paper 3)

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Get ready to enhance your understanding with this comprehensive walkthrough of a 25-marker question on raising interest rates in Turkey, designed for Edexcel A-Level Economics Paper 3. We'll delve into key microeconomics and macroeconomics topics, including the financial sector, inflation, fixed costs for businesses, investment, and savings, providing insights to help you excel.
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[@ella_mcgov2013]

I spoke about rising interest affecting business cost due to a increase to the cost of borrowing to us, I spoke about how this would reduce dynamic efficiency as firms would be making less supernormal profits and also not be able to fund interest. I thanked this to the idea that only dominant firms and monolopy may be able to tackle theese high interest rates such as in turkey as they are so high. This would reduce competition in the market, reducing productive efficiency and there is less risk of new enterants into the market as small firms wouldn’t be able to get loans to start up, this would reduce the overall productivity of the Turkish economy. However i evaluated this with the idea of turkey main industry may be more efficient as a natural monolopy due to them being large exports of primary products. I linked this to the idea that the loss is consumer welfare due to higher prices is less likely to have an impact on domestic firms, however higher prices would reduce international competiveness which could have poor impacts on potential development as income would be less and also talk about how due to them being large exporters of primary products the price elascity of demand for their exports is very high so may see very dramatic falls in demand for the good.

[@ella_mcgov2013]

I then spoke out how rising interest rates would cause inflow of hot money (using a exchange rate diagram) I would talk about how the price of the currency would further reduce the price competiveness of output, I would talk about how this would have impacts on both AD and LRAS using a diagram, as the demand for Turkish exports would decrease which could causes deflation which would be very negative. I would also link it to the idea that high interest rates would also discourage inflows of FDI as it would more expensive for firms to set up in the country as also be less attractive as exports wouldn’t be competive, a exchange rate of that is also unstable would discourage firms making trade deals with turkey as they can’t predict how much it will cost in further . I would link to the extract how this could cause living standards to fall further. To counter I would talk about how a rising exchange rates would decrease the cost of imports and as turkey is very one sector focussed this may lead to living standards rising as turkey can now afford more basic goods.

[@ella_mcgov2013]

Then I work talk about higher interest rates would also increase the cost of borrowing for the government, I would talk about how the impacts of reducing government spending would further decrease AD as it is a key component and talk about the impacts of human capital of a reduction in spending in education and healthcare, and the impacts to firms of a reduction in spending on infrastructure. I would also link to the idea of contractionary Fisical policy that the government would have to raise taxes to carry on borrowing this would reduce consumer disposable income, reducing AD further, for higher paying indivuals this may cause worker to leave the country (us the larger curve) or increase the level of tax aviodant. Or more simply how higher taxes may discourage workers and cause lower productivity which would have large impacts on international competitiveness and living standards. I would also link further to developement how reducing government spending could reduce development however I would evaluate with the idea that high interest rates would encourage people to save as the reward of saving is higher, so people would save more and in the long term this could lead to higher potential future investment talking about how the harrod domar model suggest that saving is essential for development so high interest rates would lead to potential future benefits.

[@ella_mcgov2013]

I did fully read the extracts though kinda of more read the question not in the mood for heavy reading haha

[@ella_mcgov2013]

Also I am an aqa student so my wiriting style is a bit better suit to aqa than edxcel love your videos!

[@Blessingstevens06]

@@ella_mcgov2013 the currency would appreciate because demand for turkish lira rises as investors save money in turkish banks so then value rises leading to strong exhange rates making exports expensive so AD falls as you said would deter FDI as exports less price competitive you could also link this to effects of primary produc dependency as turkey is a developing country could cause unemployment if they don't have an alternative sector to produce in

[@Blessingstevens06]

could you please break down the second point more still don't really understand

[@ella_mcgov2013]

It is quite a complex point tbh, I think if you wanted to talk about interest rates and finical sector in a more simple way you could discuss the loanable funds market, talk about the crowding out effect ect. There is a diagram you can search it up but it has a downward sloping demand curve and vertical suplly curves, you could about how high interest rate cause consumers to not want to borrow, and this could cause the collapse of finical insutution if they aren’t making enough profit, or if people are failing on loans because interest rates are too high on them you could see an illiquidity crisis where banks cant afford their libabilities

[@Blessingstevens06]

@@ella_mcgov2013 thanks I would use your point about profits on loans falling due to high interest rates . Can u r allude it talking about regulation in financial markets or stress tests which ensure in the future banks are able to survive financial crisis ensuring they have enough liquid assets if not provide the liquid assurance scheme

[@poissonerie6975]

i don't really get it either, i went for the changes in consumption level argument

[@Blessingstevens06]

@@poissonerie6975 easiest one would talking about liquidity crisis where st liquid assest dont meets St liabilities gov may bail them out so may engage in more riskier behaviour now selling KT liquid assets which don’t cover/meet their liabilities leading to moral hazards or a systemic risk of overconsumotioj of asssets because u can evaluate talking about liquid assurance or FCA regulation