Question 23M.1.HL.TZ1.2b
| Date | May 2023 | Marks available | [Maximum mark: 15] | Reference code | 23M.1.HL.TZ1.2b |
| Level | HL | Paper | 1 | Time zone | TZ1 |
| Command term | Evaluate | Question number | b | Adapted from | N/A |
Using real-world examples, evaluate the effectiveness of monetary policy in reducing a large deflationary (recessionary) gap.
[15]
Refer to Paper 1 markbands for May 2022 forward, available under the "My tests" tab > supplemental materials.
Answers may include:
- Terminology: monetary policy, deflationary (recessionary) gap.
- Explanation: of how expansionary monetary policy can be used to counter a deflationary gap using the various tools of monetary policy, such as open market operations/quantitative easing, minimum reserve requirements and changes in the central bank’s minimum lending rate.
- Diagram: AD/AS diagram to show AD shifting right with the deflationary gap being closed/eliminated.
- Synthesis (evaluate): evaluation of the effectiveness of monetary policy in terms of the limitations, eg limited scope for lowering interest rates when close to zero, low consumer confidence, ineffective in relation to structural unemployment and the possibility of greater inflation; and its strengths, eg short time lags, incremental, flexible and easily reversible; comparison between the effectiveness of monetary and fiscal policy when there is a large recessionary gap.
- Examples: real-world examples of monetary policy being used to counter a deflationary gap.
Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.
Assessment Criteria
Part (b) 15 marks
Most candidates appeared well-prepared to discuss the effectiveness of monetary policy in reducing a large deflationary gap. However, some candidates confused the deflationary (recessionary) gap with deflation and monetary policy with fiscal policy. The most common weaknesses were candidates not explaining in detail the monetary policy tools and candidates providing diagrams and/or real-world examples where the economy does not start in a situation with a large deflationary (recessionary) gap.
