Explain the quantity theory of money. Consider its relevance to economic policies that might be used to control inflation.

Mark scheme

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

1. [12] L4 (9-12): for an answer that attempts to evaluate the relevance of the theory to policies used to control inflation. Difficulties relating to how we measure the variables might be discussed and/or the effectiveness of polices based on this theory in relation to alternative policies
2. [12] L3 (7-8): for an answer that uses the formula to analyse the potential impact on the price level when the money supply increases and which recognises the importance of reducing the growth of the money in order to control inflation
3. [12] L2 (5-6): for an answer that states the formula and explains each variable and the assumptions which are made regarding V and T
4. [12] L1 (1-4): for an answer that has some basic correct facts but includes irrelevancies and errors of theory
5. [13] L4 (9-13): for an answer that discusses the contention and identifies alternative explanations of the relationship between inflation and unemployment. Some reference to problems with empirical evidence or the neglect of inflationary expectations might be discussed. A conclusion should be provided
6. [13] L3 (7-8): for an answer that analyses the relationship between inflation and unemployment and which provides an accurately labelled supporting diagram. Comments upon the particular shape of the curve and/or it was derived might also be made
7. [13] L2 (5-6): for answer that demonstrates knowledge of the relationship between inflation and unemployment as indicated by the Phillips curve
8. [13] L1 (1-4): for an answer that has some basic correct facts but includes irrelevancies and errors of theory