Skip to content

IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

A government deregulates entry into a local banking market by easing licensing requirements, allowing new competitors. What is the most likely effect on existing banks, according to market-based supply-side thinking?

Easing licensing and entry rules makes the banking market more contestable, so incumbents face pressure from potential and actual new entrants. They are pushed to cut costs and improve products or risk losing customers. Barriers fall rather than rise, and prudential supervision is still needed.

  1. AGreater contestability, pushing incumbents to cut costs and improve products or lose customersCorrect
  2. BHigher barriers to entry, allowing incumbents to raise prices
  3. CA fall in aggregate demand for banking services in the long run
  4. DAn automatic rise in interest margins for all banks
  5. Removal of the need for any prudential supervision

Explanation

Easing entry lowers barriers and raises the threat of new competitors, making the market more contestable. Incumbents face pressure to improve efficiency and service. Deregulating entry does not raise barriers, does not guarantee wider margins, and does not remove the need for prudential supervision.

Did you get it right without looking?

One question tells you little. A timed set on Supply-side policies and their impact on businesses shows your real accuracy, how long you take and where you lose marks.

Practise Supply-side policies and their impact on businessesFree diagnostic mock

More Supply-side policies and their impact on businesses questions