Lesson 4.2.4.4

4.2.4.4 The regulation of the financial system Quiz: AQA Economics, Unit 2

20 questions

Written by Revision Ninja · Last reviewed 11 October 2026

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Lesson 4.2.4.4, The regulation of the financial system: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. Which UK body has the role of regulating the prudential soundness of banks and other deposit-takers?

    • The Prudential Regulation Authority
    • The Office for Budget Responsibility
    • The Financial Conduct Authority
    • The Monetary Policy Committee

  2. What is the role of the Financial Policy Committee (FPC)?

    • To identify and monitor risks to the stability of the UK financial system as a whole
    • To set the level of public sector pay
    • To set the interest rate for mortgages offered by high street banks, which is fixed by the committee at each of its quarterly meetings
    • To collect taxes from banks and building societies

  3. What is moral hazard in banking?

    • The incentive for banks to take excessive risks because they expect to be rescued if they fail
    • The obligation for banks to report every transaction to the government, which the government then uses to set the bank rate each month
    • The fear of customers that their bank will close without warning
    • The duty of banks to avoid lending to unethical businesses

  4. What is systemic risk?

    • The risk that a company's shares fall in price on the stock market, which affects only the shareholders and never other firms or banks
    • The risk that a single customer fails to repay a personal loan
    • The risk that problems in one part of the financial system spread to others and damage the real economy
    • The risk of changes in the exchange rate for a single firm

  5. What is a liquidity ratio for a financial institution?

    • The proportion of a bank's loans that are issued to households
    • The ratio of a bank's staff costs to its total revenue, which is set by the regulator and does not change with the bank's assets
    • The proportion of a bank's assets held in forms that can be quickly turned into cash
    • The proportion of a bank's profit paid as dividends to shareholders

  6. What is a capital ratio for a bank?

    • The ratio of cash held in branches to the number of customers
    • The share of a bank's capital that is held in foreign currency
    • A measure of a bank's capital, such as equity, relative to its risk-weighted assets, which provides a buffer against losses
    • The ratio of a bank's deposits to its loans, used to set interest rates across the whole economy and to determine each bank's profit margin

  7. Why might a bank fail when it borrows short term and lends long term?

    • It may be unable to refinance its short-term borrowing when lenders withdraw funds, forcing it to sell long-term assets at a loss
    • Long-term lending means the bank never needs to make any payments
    • Long-term loans always lose value immediately, so the bank is always insolvent
    • Short-term borrowing is always repaid with government money, so there is no risk, and the bank can always refinance its loans cheaply

  8. A bank holds 50 million pounds of liquid assets and has 500 million pounds of deposits. What is its liquidity ratio on deposits?

    • 5 per cent
    • 2 per cent
    • 50 per cent
    • 10 per cent

  9. A bank has capital of 40 million pounds and risk-weighted assets of 800 million pounds. What is its capital ratio?

    • 20 per cent
    • 50 per cent
    • 0.5 per cent
    • 5 per cent

  10. A bank funded mainly by short-term wholesale loans finds lenders refuse to roll over its debts. What type of crisis is this most like?

    • An inflation shock caused by rising prices of goods
    • An exchange rate crisis caused by rising imports
    • A liquidity crisis, because the bank cannot raise cash to meet its obligations
    • A solvency crisis caused by a rise in deposits, where the bank's assets are worth less than its liabilities after the deposits arrive

  11. A government bails out a large bank that took excessive risks. What is the main concern this raises?

    • A reduction in the number of bank branches, because the bank has to close them and sell the buildings to meet its obligations
    • Inflation, because the bailout raises the price of all goods in the economy
    • A fall in the exchange rate, because the bailout uses foreign reserves
    • Moral hazard, because other banks may take greater risks expecting similar rescues

  12. A large bank fails and many businesses lose access to credit. Which concept does this best illustrate?

    • Deflation, as prices fall following the failure
    • Systemic risk, as problems in one institution spread to the real economy
    • Factor mobility, as workers move between regions
    • Comparative advantage, as firms specialise in different products and trade them with partners who have lower opportunity costs

  13. Which body in the UK has the main role of regulating the conduct of financial firms and protecting consumers of financial services?

    • The Treasury's fiscal committee
    • The Financial Conduct Authority
    • The Bank of England's Monetary Policy Committee
    • The Prudential Regulation Authority

  14. Why might tighter financial regulation reduce the amount of lending in an economy?

    • Regulation always increases the amount of lending, because banks feel safer and so lend more to every customer in every sector
    • Regulation has no effect on bank lending in any circumstance
    • Higher capital and liquidity requirements make lending more costly for banks, which can reduce credit supply
    • Regulation reduces lending only when interest rates are negative

  15. In a boom, the Financial Policy Committee raises a countercyclical capital buffer for banks. What is the main purpose?

    • To transfer money from banks to the Treasury for public spending, which reduces the amount of credit available to households
    • To reduce bank capital so banks lend more to households during a boom
    • To lower interest rates on mortgages for first-time buyers
    • To build up bank capital in good times, so banks can absorb losses in a downturn

  16. Evaluate the trade-off between financial stability and efficiency in regulation.

    • Regulation always improves both stability and efficiency at the same time, so there is never any reason to debate the balance between them
    • Regulation should be abolished, because markets always self-correct
    • Regulation has no effect on either stability or efficiency
    • Tighter rules improve stability but can raise costs and restrict credit, so regulators must balance the two

  17. Evaluate whether moral hazard can be fully removed from banking.

    • It cannot be reduced at all, because banks always expect rescue
    • It can be reduced through capital requirements and bail-in rules, but it is unlikely to be eliminated completely
    • It is removed automatically once interest rates are set by the central bank, since rate setting makes banks act prudently in every case
    • It can be eliminated entirely by removing all regulation from banks

  18. Explain how a sharp fall in asset prices could create systemic risk that affects the real economy.

    • Falling asset prices always raise bank capital, so lending increases and the real economy grows, with no risk to any financial institution
    • Banks holding falling assets may need to sell them at a loss, reducing capital and cutting lending to firms and households
    • Asset prices have no link with banks, so they cannot cause systemic risk
    • Falling asset prices always reduce inflation, which benefits the real economy

  19. A bank faces a run by depositors and must sell assets quickly at low prices. Which sequence best describes the risk?

    • Low liquidity forces asset sales at a loss, which reduces capital and can threaten solvency
    • Asset sales raise prices, which protects the bank from any loss
    • Deposits rise automatically, which prevents any loss in capital
    • High liquidity forces asset sales at a profit, which raises capital and solvency and so removes any need for the bank to hold reserves

  20. Evaluate the division of responsibility between the PRA and the FCA.

    • Splitting prudential and conduct supervision can focus each body, but coordination is needed to avoid gaps in oversight
    • The split is pointless, because one body could do both jobs without any coordination
    • The split means the PRA sets interest rates while the FCA regulates the exchange rate, so the two bodies have no role in bank supervision
    • The split removes the need for any supervision of banks or insurers

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