CAIE A-Level Economics 9.4.5 Money supply changes

CAIE A-Level Economics 9.4.5 Money supply changes
Cambridge International AS & A Level Economics 9708 syllabus for exams in 2026, 2027 and 20282026–2028

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

How this is tested

  • 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

Question 24

[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?

A

when the economy was experiencing a high level of inflation

B

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

C

when there was a deep recession with high levels of unemployment

D

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