Cambridge OCR A Level · Economics - H460

Money and interest rates: Practice Questions

5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Money and interest rates.

10 questions31 marksFree, no account

Question 1

1 mark

In the context of the financial sector, what distinguishes narrow money from broad money?

Question 2

1 mark

In an economy where the central bank targets a specific interest rate, what must occur to the money supply if there is an increase in the demand for money (for example, due to a rise in real GDP)?

Question 3

1 mark

According to the Fisher equation of exchange, \(MV = PQ\), what is the most likely effect of a 10% increase in the money supply (\(M\)) if the velocity of circulation (\(V\)) remains constant and the economy is currently operating at full capacity?

Question 4

1 mark

In the liquidity preference theory of interest rate determination, a significant increase in the price level (inflation) is most likely to cause which of the following movements in the money market diagram?

Question 5

1 mark

According to the Quantity Theory of Money, if an economy experiences a persistent increase in the money supply beyond the growth of real output, what is the long-run consequence according to Monetarists?

Question 6

4 marks

State the Fisher equation of exchange and identify what each variable represents in the relationship between the money supply and the price level.

Write your answer out first, then check it against the worked solution.

Question 7

6 marks

In the context of the liquidity preference theory, analyze how an increase in the money supply by the central bank affects the equilibrium interest rate, assuming the demand for money remains constant.

Write your answer out first, then check it against the worked solution.

Question 8

3 marks

Explain how narrow money differs from broad money in terms of liquidity within the financial sector.

Write your answer out first, then check it against the worked solution.

Question 9

5 marks

(a) Explain the difference between narrow money and broad money in terms of their liquidity and components. (3 points)

(b) Using the Fisher equation of exchange, \( MV = PT \), calculate the price level (P) if the money supply (M) is \( \$500 \) billion, the velocity of circulation (V) is 4, and the volume of transactions (T) is 200 billion units. (2 points)

Write your answer out first, then check it against the worked solution.

Question 10

8 marks

(a) With the aid of a diagram, explain how the interaction between the demand for money (liquidity preference) and the supply of money determines the equilibrium interest rate in an economy. (4 points)

(b) Evaluate the extent to which a central bank can successfully use changes in the money supply to influence macroeconomic indicators such as inflation and real GDP growth. (4 points)

Write your answer out first, then check it against the worked solution.

* The content provided by thinka is generated by AI and may not always be accurate or up-to-date. Please use it as a supplementary resource and verify with official materials.

You've seen the model answer. Now get yours marked.

This page can show you how a good answer looks. It cannot tell you what your answer was missing. thinka marks your written work against the real mark scheme in about 15 seconds.

Get My Answers Marked Back to the notes

Want more questions like these? Get a fresh set on this topic, marked as you go.