Question 21M.1.SL.TZ2.4b
| Date | May 2021 | Marks available | [Maximum mark: 15] | Reference code | 21M.1.SL.TZ2.4b |
| Level | SL | Paper | 1 | Time zone | TZ2 |
| Command term | Evaluate | Question number | b | Adapted from | N/A |
Evaluate the effectiveness of monetary policy in reducing an economy’s rate of inflation.
[15]
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.
Answers may include:
- definitions of monetary policy, inflation
- diagram to show AD shifting left as a result of contractionary monetary policy
- explanation of how contractionary monetary policy may help to reduce demand-pull inflation in terms of the mechanisms by which higher interest rates reduce AD via the effect on consumption, investment and/or net exports
- examples of contractionary monetary policy being used in practice or examples of inflation targeting
- synthesis or evaluation.
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.
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.
