Question 21M.1.SL.TZ1.4b
| Date | May 2021 | Marks available | [Maximum mark: 15] | Reference code | 21M.1.SL.TZ1.4b |
| Level | SL | Paper | 1 | Time zone | TZ1 |
| Command term | Evaluate | Question number | b | Adapted from | N/A |
Evaluate the effectiveness of monetary policy in reducing an economy’s rate of unemployment.
[15]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definitions of monetary policy, rate of unemployment
- diagram to show AD shifting to the right as a result of expansionary monetary policy
- explanation of how expansionary monetary policy may help to reduce cyclical (demand-deficient) unemployment in terms of the mechanisms by which lower interest rates increase AD via the effect on consumption, investment and/or net exports
- examples of expansionary monetary policy being used in practice
- synthesis or evaluation.
Evaluation may include: the implications of monetary policy in terms of the ability to implement changes in interest rates relatively quickly and incrementally, the limited political constraints, the possible conflicts with other objectives of economic policy, time lags, the independence of the central bank, the ineffectiveness of monetary policy in relation to structural unemployment / the natural rate of unemployment, its possible ineffectiveness during a recession, the possibility that alternative policies (e.g. supply-side policy) may be more effective.
Candidates were reasonably successful in explaining the nature of expansionary monetary policy, which seemed to be a concept that is well-understood. Many were able to explain that it involves the lowering of interest rates and other devices as well. However, the mechanisms by which these different aspects of monetary policy would lead to an increase in aggregate demand, greater economic growth and eventually a decrease in the rate of unemployment were often not fully developed. Monetary policy was sometimes evaluated on its own, drawing on a standard set of pre-learned points, but not usually in terms of its effectiveness in specifically lowering the rate of unemployment. Thus, answers given were often too general and generic, without sufficient focus on reducing unemployment.
