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Economics IGCSEPDF 55
118 pagesrevision 46932
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■ Engine of Credit: They provide the loans (credit) that enable investment
by firms and large purchases by households (e.g., houses). This is vital
for economic growth.
■ Financial Intermediation: They channel funds from savers to borrowers, a
critical function for a modern economy. Without them, investment would be
very difficult.
Conclusion/Evaluation: While commercial banks are vital for the daily
functioning of the economy and for individuals, the central bank is arguably more
important. Its role in maintaining the stability of the entire financial system and
managing the macroeconomy provides the secure foundation upon which
commercial banks can operate. A central bank failure would have catastrophic
consequences for the entire economy.
3.2 Households
This section examines the factors that influence household decisions on spending, saving, and
borrowing, and how these patterns differ across income levels.
Definitions
Disposable Income: The income
that is available to a household for
spending and saving after direct
taxes (like income tax) have been
deducted. Real Income: Income
adjusted for inflation. It measures
the amount of goods and services
that can be bought with a given
income.
Spending
(or
Consumption):
total
expenditure by households on
goods and services.
The
Saving: The portion of disposable
income that is not spent.
Borrowing: Taking out money from
a financial institution with the
intention of paying it back over a
period of time with interest.
Wealth: The total value of all assets
owned by a household (e.g.,
property, shares, savings) minus
their liabilities (e.g., debts,
mortgages).
Notes
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