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Date May 2021 Marks available 15 Reference code 21M.1.SL.TZ2.4
Level Standard level Paper Paper 1 Time zone Time zone 2
Command term Evaluate Question number 4 Adapted from N/A

Question

Explain how expansionary monetary policy could be used to close a deflationary (recessionary) gap.

[10]
a.

Evaluate the effectiveness of monetary policy in reducing an economy’s rate of inflation.

[15]
b.

Markscheme

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

a.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

Evaluation may include: the implications of monetary policy in terms of the ability to implement changes in interest rates relatively quickly through the banking system, the possible conflicts with other objectives of economic policy, such as growth / unemployment, time lags, the independence of the central bank; the ineffectiveness of monetary policy in relation to cost-push inflation; the possibility that alternative policies (e.g. supply-side policies) may be more effective.

b.

Examiners report

Many students showed a good understanding of expansionary monetary policy and the deflationary gap and clearly explained how reducing interest rates can lead to an increase in aggregate demand and close a deflationary gap. These answers were illustrated by effective aggregate demand and supply diagrams and in some cases real-world examples. Although, as was said earlier, students do find using examples with macroeconomic questions challenging.   

a.

This question also produced many good responses from candidates. The best answers showed a clear understanding of how contractionary monetary policy reduces aggregate demand and leads to a fall in demand-pull inflation. These responses were well illustrated by aggregate demand and supply diagrams. Finding a real-world example to support their answers proved quite challenging for students, although there were some effective points about countries using monetary policy to control inflationary pressures. It was good to see candidates evaluating their answers by considering the deflationary threat of increasing interest rates and a possible rise in unemployment, along with the problem of using contractionary monetary policy to deal with cost-push inflation. The best answers often included discussion of other policy options to reduce inflation such as fiscal policy and supply-side policies.

b.

Syllabus sections

Last exams 2021 » Section 2: Macroeconomics » 2.5 Monetary policy » The role of monetary policy » Monetary policy and inflation targeting
Last exams 2021 » Section 2: Macroeconomics » 2.5 Monetary policy » The role of monetary policy » Evaluation of monetary policy
Last exams 2021 » Section 2: Macroeconomics » 2.5 Monetary policy » The role of monetary policy
First exams 2022 » Unit 3: Macroeconomics » 3.5 Demand management (demand side policies)—monetary policy » 3.5.8 Effectiveness of monetary policy
Last exams 2021 » Section 2: Macroeconomics » 2.5 Monetary policy
First exams 2022 » Unit 3: Macroeconomics » 3.5 Demand management (demand side policies)—monetary policy
Last exams 2021 » Section 2: Macroeconomics
First exams 2022 » Unit 3: Macroeconomics
First exams 2022
Last exams 2021

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