Explain what is used as money in a modern economy. Consider how an increase in the money supply can cause inflation.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2017). The mark or mark type is shown in brackets.

1. For a statement of what money is in terms of general acceptability in settlement of debt (1 mark)
2. For an explanation of what acts as money in a modern economy. Cash and bank deposits. (Up to 3 marks)
3. Candidates should make reference to cash and bank deposits. There should be some understanding of the various forms of near money.
4. No reference to bank deposits maximum of 2 marks.
5. For application showing how an increase in the money supply can cause inflation. (4 marks)
6. The Quantity Theory of Money is not necessary but can be credited. Candidates should describe how an increase in the money supply can trigger spending and cause demand-pull inflation.
7. For analysis that explains The internal consequences of inflation (Up to 6 marks)
8. The internal consequences include the haphazard re-distribution of income, the negative impact upon savings and investment, shoe-leather costs and menu costs.
9. For analysis that explains The external consequences of inflation (Up to 6 marks)
10. The external consequences are that the goods of the economy that experiences inflation will become uncompetitive with consequences for that economy's balance of payments and exchange rate.
11. (8 marks maximum for analysis)
12. For evaluation assessing the circumstances under which the internal consequences might be more serious for an open economy (3 marks)
13. The external consequences might be less serious if the rate of inflation in an economy is lower than that in competitor nations. Also, the impact of the inflation might be offset by a decline in the exchange rate.
14. and including a conclusion regarding whether this is likely to occur (1 mark)
15. (4 marks maximum)