MONEY & BANKING
What is a characteristic of money?
Scarcity Divisiblity Acceptability etc.
What is productivity?
Output per worker.
What is banks prefer lending to large firms?
Market concentration (three banks control two-thirds of market → less competition)
Banks prefer established firms
Higher perceived default risk
Lack of collateral
What is market failure?
Possible response:
Market failure occurs when the free market allocates resources inefficiently, leading to overproduction or underproduction.
What are two functions of money?
Store of value, medium for exchange etc.
Why does higher production not necessarily mean higher productivity?
labour increased faster than output+lower efficiency
If the government subsidises SME loans, what are possible unintended consequences?
Firms may become dependent on government support or take excessive risks, leading to inefficiency.
How does a tax correct a negative externality?
Possible response:
A tax increases production costs, shifting the supply curve left and reducing output toward the socially optimal level.
How does Central Bank maintain price stability?
by controlling interest rates and money supply.
Why is the supply of skilled young workers price inelastic in the short run?
Training takes time / limited short-run flexibility
Differentiate the functions of commercial and central banks
The central bank regulates the banking system and maintains price stability by setting the policy interest rate and controlling money supply. It does not normally lend to the public. In contrast, commercial banks accept deposits from households and firms and provide loans to earn profit. They charge higher interest rates than the central bank’s policy rate to cover costs and risk.
When might a tax fail to reduce consumption?
If demand is inelastic, quantity demanded will not fall significantly despite higher prices.
If commercial banks charge 8% on 100,000 MAD. What's the total repayment?
108,000 MAD
Identify two structural reasons why youth unemployment may be higher
Skills mismatch
Lack of experience
Labour market rigidity
Information asymmetry
Rapid population growth
What is the result of higher policy rate?
When the policy rate increases, commercial banks raise lending rates. Borrowing becomes more expensive, so firms reduce investment and households reduce consumption. This lowers aggregate demand.
How could intervention worsen inefficiency?
If the government sets taxes or subsidies incorrectly, it may overcorrect or create unintended consequences, known as government failure.
Why are commercial bank rates higher than the policy rate?
Commercial banks charge interest rates higher than the central bank’s policy rate to cover operating costs, compensate for the risk, and earn profit. The difference between borrowing and lending rates is their source of income.
Morocco subsidises firms hiring young workers. Youth employment rises, but productivity falls. Evaluate whether the policy is successful
Firms may hire more workers than efficient (overemployment)
Marginal productivity may fall
Subsidy may distort incentives
Trade-off: employment vs productivity
Stakeholder impact
Short-run vs long-run evaluation
Using one of CLASP, judge whether credit market intervention would always improve efficiency.
It depends on long-run effects (human capital gains), assumptions (accurate risk assessment), stakeholders (SMEs vs taxpayers), and priorities (growth vs stability). Therefore, intervention is not always effective.
Using CLASP, judge whether the tax is effective.
L – Long Run vs Short Run
In the short run, demand for goods such as cigarettes may be inelastic, so consumption may not fall significantly. However, in the long run, consumers may adjust behaviour, making the tax more effective over time.
A – Assumptions
The tax assumes consumers respond rationally to price increases. If addiction or habits make demand inelastic, behaviour may not change substantially.
Priorities: Health vs equity trade-off