In 2009, a digital currency called Bitcoin was invented. Between 2009 and 2014 there was a growth in the number of people and firms accepting it as a medium of exchange and store of value. Financial experts have called for digital money to be regulated by central banks. One of their concerns is that it could increase the money supply and cause inflation.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2015). The mark or mark type is shown in brackets.

1. [1] A form of money
2. [1] that is used to buy and sell products
3. [1] generally acceptable
4. [1] it is one of the functions of a central bank to issue notes and coins
5. [1] a commercial bank is usually not allowed to issue notes and coins
6. [1] the customers of the central bank are commercial banks and the government
7. [1] people and firms are the customers of commercial banks
8. [1] the central bank implements monetary policy
9. [1] commercial banks are affected by monetary policy
10. [1] the central bank is government owned
11. [1] commercial banks are usually in the private sector
12. [1] an increase in the money supply may increase spending
13. [1] may increase the circular flow
14. [1] spending may increase by more than output
15. [1] too much money chasing too few goods
16. [1] causing demand-pull inflation/monetary inflation
17. [1] people may spend more now before prices rise
18. [1] also less income may be available to save with higher prices
19. [1] the rate of interest may rise by less than inflation
20. [1] and so people will lose by saving
21. [1] an increase in the money supply usually reduces the rate of interest
22. [1] a lower interest rate reduces the incentive to save
23. [1] price stability is the avoidance of fluctuations in the price level
24. [1] price stability can lessen the chance of purchasing power being eroded
25. [1] meaning people will be able to buy fewer goods and services with the same amount of money
26. [1] protecting living standards
27. [1] price stability can give firms confidence
28. [1] this will encourage them to invest
29. [1] price stability can give people confidence
30. [1] this will encourage them to save
31. [1] price stability can increase international competitiveness
32. [1] improve the current account position
33. [1] price stability can discourage people and firms from acting in ways that will cause inflation
34. [1] e.g. asking for wage rises
35. [1] price stability can encourage MNCs to set up in the country
36. [1] creating output and employment
37. [1] price stability can benefit those on fixed incomes
38. [1] as their purchasing power will not be eroded
39. [1] price stability reduces menu costs
40. [1] firms will not have to change prices so frequently
41. [1] price stability lowers shoe leather costs
42. [1] firms will not have to move money in search of the highest interest rate
43. [1] inflation can have benefits
44. [1] may stimulate output
45. [1] if demand-pull inflation
46. [1] may reduce debt burden
47. [1] may cut real wage bill
48. [1] policy measures designed to reduce inflation may cause unemployment/slow economic growth
49. [1] e.g. high interest rates may discourage spending and investment
50. [1] lower demand
51. [1] pursuing other aims may bring benefits (Up to 2 marks for identifying other aims).
52. [1] Up to 2 marks for developing another aim e.g. economic growth can create employment
53. [1] raise living standards
54. [1] what should be the main aim will be influenced by the level of economic activity
55. [1] e.g. if unemployment is very high that may be causing significant problems