'Central banks can control interest rates but they cannot control the money supply. Commercial banks can control the money supply but they cannot control interest rates.' To what extent would you agree with this statement?

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. Answers should address both parts of the statement. Central banks can control interest rates in different ways. Some announce changes to the bank rate while others operate in short term money markets to influence interest rates Answers should also recognise that central banks also have access to a range of policies which can be used to determine the money supply. Responses should also discuss how commercial banks can influence both interest rates and the money supply. Part of the assessment should include recognition that interest rates and the money supply are closely related.
2. L4 (9-12 marks): for an answer that evaluates the extent to which a central bank can control interest rates/money supply and the extent to which a commercial bank can control interest rates/money supply. A conclusion which makes an attempt to discuss how far the statement provides an accurate assessment of the ability of both organisations to control interest rates/money supply is required.
3. L3 (7-8 marks): for an answer that attempts to analyse how a central bank can control interest rates and the money supply, as well as analysing how commercial banks can also influence both interest rates and the money supply. Some reference to the connection between interest rates and the money supply should be provided.
4. L2 (5-6 marks): for an answer that provides a descriptive account of how central banks and commercial banks can influence both interest rates and the money supply.
5. L1 (1-4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.
6. Answers should refer to the monetary transmissions mechanism to show how monetary policy might have some effect on real variables such as the level of output. Reasons why monetary policy might not work might include reference to the liquidity trap, elasticity of MEC curve and the effect of negative expectations on investment. Should discuss whether monetary policy is the only effective way to control inflation by considering alternatives such as fiscal policies and/or direct controls such as prices and incomes policies.
7. L4 (9-13 marks): for an answer that discusses the effectiveness of the transmissions mechanism by questioning the relationship between changes in the money supply, changes in the rate of interest and investment and subsequent changes in output. Some discussion relating to the effectiveness of alternative polices used to control inflation would also be required. There should be a conclusion.
8. L3 (7-8 marks): for an analytical approach that uses diagrams to explain the monetary transmissions mechanism and makes the links between money supply changes, changes in interest rates, changes in investment and, through the multiplier, changes in the level of output. Responses will also analyse alternative approaches which governments can use to control inflation.
9. L2 (5-6 marks): for an answers that provides a description of different types of monetary policy and how these might affect real output, plus an explanation of a possible alternative approach to controlling inflation which does not involve controlling the money supply.
10. L1 (1-4 marks): for an answer that has some basic correct facts but includes irrelevancies and errors of theory.