Explain the Keynesian theory of the determination of the rate of interest.

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

1. Keynesian theory of interest rates. Determination of the three demands for money: Transactionary/precautionary and speculative, effect of a change in the rate of interest interaction with the quantity of money to determine the rate of interest.
2. L4 (9-12 marks): For a detailed explanation of the theory- it should refer to all 3 demands for money in detail.
3. L3 (7-8 marks): For a more detailed explanation of the theory- it should refer to 2 of the 3 demands for money in some detail.
4. L2 (5-6 marks): For a limited but accurate explanation of the theory. It should refer to all 3 demands for money and one in detail.
5. L1 (1-4 marks): For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.
6. Explanation of the meaning of QE. Discussion of the impact of QE either through the wealth effect from rising asset prices or effect on interest rates. The money transmission mechanism and its impact on aggregate demand. Multiplier effect of increased consumption on imports/taxation/investment.
7. L4 (9-13 marks): For a balanced answer which explains QE and discusses in detail the impact of QE on a range of economic variables. . Maximum 11 marks if no conclusion.
8. L3 (7-8 marks): For an answer which explains QE and discusses the impact of QE on a single economic variable e.g. output.
9. L2 (5-6 marks): For an answer which explains QE but fails to apply its impact to the economy.
10. L1 (1-4 marks): For an answer which has some basic correct facts but includes irrelevancies. Errors of theory or omissions of analysis will be substantial.