Discuss the effects of an expansionary monetary policy on the demand for money.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2019). The mark or mark type is shown in brackets.

1. [12] Expansionary monetary policy relates to the use of changes (increases) in the money supply and changes (decreases) in interest rates.
2. [12] These changes would be expected to have a positive effect on aggregate demand which might increase output and employment.
3. [12] Each of the three motives for the demand for money would be affected by changes in income and changes in interest rates.
4. [12] A discussion of the impact on each is required.
5. [13] In the short run, expansionary fiscal policy will increase aggregate demand by increasing government spending and/or reducing the level of taxation.
6. [13] With zero price expectations in the short run, this will decrease unemployment whilst also creating non-accelerating inflation.
7. [13] Monetarists suggest that in the long run, once price expectations are built into wage bargaining, wages will rise and unemployment will then also rise.
8. [13] This process will continue as long as governments attempt to create jobs using deficit financing.