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Question 21M.1.SL.TZ2.a

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Date May 2021 Marks available [Maximum mark: 10] Reference code 21M.1.SL.TZ2.a
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.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.   

Syllabus sections