Consider the extent to which the commercial banks can influence the money supply.

Mark scheme

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

1. There are many definitions of the money supply. The narrow definition includes notes and coins in circulation and balances held by the commercial banks at the central bank. The more commonly used broad definition includes notes and coins in circulation and bank deposits. Bank deposits represent the largest part of the money supply. Commercial banks create new bank deposits every time they grant a loan. It is profitable for banks to create loans, so banks often have a significant effect on the broad definition of the money supply. However, there are limits to the ability of banks to create new deposits. These might include: the willingness of borrowers to borrow; leakages of funds (loans not re-deposited); the need for banks to maintain a safe amount of liquid assets; restrictions upon lending imposed by governments.
2. L4 (9-12): for an answer that recognises that there are a number of limitations to the ability of commercial banks to create new deposits. Should refer to at least two reasons why commercial banks’ ability to influence the money supply might be limited
3. L3 (7-8): for an answer that analyses how banks can create money by granting loans and why banks have an incentive to do this. Might also refer to the importance of the bank credit multiplier
4. L2 (5-6): for an answer that recognises that there are different definitions of the money supply and that the most important measure includes bank deposits which also account for the biggest proportion of this measure
5. L1 (1-4): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant
6. Candidates should explain what quantitative easing means and how it is used to influence interest rates and the money supply. Links should then be established between these changes and changes in the level of employment and the rate of inflation. Some discussion should then be applied to possible short-run effects on the economy and also some potential long-run effects. In each case candidates are expected to evaluate key relevant factors and draw a conclusion in relation to the statement under consideration.
7. L4 (9-13): for an answer that attempts to distinguish between short-run effects on the level of employment and the potential long-run effects on inflation. Evaluative comment should be used to decide how far the candidate agrees with the statement and a relevant conclusion should be provided
8. L3 (7-8): for an answer that critically analyses the way in which quantitative easing is supposed to work and how it might have worked in practice
9. L2 (5-6): for an answer that explains what quantitative easing means and how it can be used to influence interest rates and possibly the money supply
10. L1 (1-4): for an answer that shows some knowledge but does not indicate that the question has been fully grasped or where the answer is mostly irrelevant