9.4 Money and banking

In periods of rising and persistent inflation, consumers and workers change their expectations of the future rate of inflation.

Evaluate, with the help of a diagram(s), the consequences of these changes of expectations for fiscal policy. [20]

Central banks can control the money supply. An increase in the money supply will cause inflation, therefore central banks can control inflation.

Evaluate this statement. [20]

a) Explain, with the help of a diagram, the Keynesian theory of the liquidity trap and consider the importance of the liquidity trap to government policy makers when an economy is in a recession. [12]

The most important aim of a central bank is to control the money supply while the most important aim of a commercial (retail) bank is to maximise profits.

b) Discuss the extent to which these two aims can be achieved together. [13]

a) Explain what is meant by a transmissions mechanism of monetary policy and consider why it might not work in practice. [12]

b) Discuss the role and importance of the commercial banks in a developed economy. [13]

a) Explain the relationship between the Keynesian demand for money and the rate of interest. [12]

a) Consider, with the help of a circular flow diagram, the potential impact of a fall in the rate of interest on the level of output and the level of employment. [12]

a) Explain the quantity theory of money and discuss why the theory might not work in practice. [12]

a) Explain the quantity theory of money and consider its relevance for a country's macroeconomic policy. [12]

a) Explain the role of liquidity preference in the determination of interest rates and assess its importance. [12]

b) Keynes argued that the rate of interest will not ensure that the level of savings will equal the level of investment in an economy because savings and investment are undertaken by different individuals for different reasons. Explain this statement and discuss how far you would support this view. [13]

a) Explain and critically evaluate the quantity theory of money. [12]

b) Monetary policy relies heavily on the theory of a monetary transmission mechanism. Explain how a monetary transmission mechanism works and discuss its effectiveness. [13]