DP Economics
Question 21M.1.SL.TZ2.4a
| Date | May 2021 | Marks available | [Maximum mark: 10] | Reference code | 21M.1.SL.TZ2.4a |
| Level | SL | Paper | 1 | Time zone | TZ2 |
| Command term | Explain | Question number | a | Adapted from | N/A |
a.
[Maximum mark: 10]
21M.1.SL.TZ2.4a
(a)
Explain how expansionary monetary policy could be used to close a deflationary (recessionary) gap.
[10]
Markscheme
Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.
Answers may include:
- definitions of monetary policy, expansionary monetary policy, deflationary gap
- diagrams to show a deflationary gap and how it would be closed by a shift of AD to the right and/or increasing money supply that leads to decrease in the interest rates
- explanation that by increasing the money supply/decreasing the interest rate the central bank stimulates consumption, investment and/or net export, leading to an increase in AD and return of the real GDP to its potential level
- examples of countries that have used expansionary monetary policy to close a deflationary gap.
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.
