CAIE A-Level Economics 9.4.5 Money supply changes

Practise explaining how central banks, commercial banks, deficit finance, QE and external flows change the money supply.

Exam points

interpret QE diagrams showing bond purchases, money supply increases and lower interest rates
explain how reserve or liquidity ratio changes alter commercial bank credit creation
link deficit financing or balance of payments flows to changes in domestic money supply

[Maximum number: 1]

A political party proposed a policy of quantitative easing (the creation of money by the central bank).
When would such a policy be least likely to destabilise the macroeconomy in the short run?

when the economy was experiencing a high level of inflation

when the economy had price stability but there was full employment of the labour force

when there was a deep recession with high levels of unemployment

when there was full employment and a current account balance of payments deficit

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9.4.5—Money supply changes question 1