In 2021, the central bank of Turkey cut the interest rate on four occasions. This was despite the country’s inflation rate rising from 15% at the start of the year to 36% at the end of the year. Turkish commercial banks attracted more customers which led to a 10% rise in bank deposits. The country’s currency, the Turkish lira, fell to a record low against the US dollar later that year.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2024). The mark or mark type is shown in brackets.

1. [1] A government-owned bank.
2. [1] Operates monetary policy / sets interest rates / manages foreign exchange rates.
3. [1] Provides banking services to the government / commercial banks.
4. [2] A commercial bank could attract more customers by offering a lower interest rate on loans, which would make borrowing more attractive to new customers.
5. [2] Alternatively, it could offer higher interest rates on savings, enticing more customers to deposit their money with the bank.
6. [2] Commercial banks could make loan conditions easier, for example, by lending to people with lower incomes or giving longer repayment periods.
7. [2] They could improve or increase the range of services offered, such as providing insurance or bank cards with added benefits.
8. [2] Increasing accessibility, by opening more branches or expanding internet banking services, could also attract more customers.
9. [2] Advertising may also increase brand awareness and attract new customers.
10. [2] A central bank or government may reduce a fixed exchange rate (devaluation) to correct a balance of payments deficit.
11. [2] A central bank or government may try to reduce a floating exchange rate by decreasing the interest rate or by selling the domestic currency.
12. [2] An increase in the supply of the currency, possibly due to increased imports, increased investment in other countries, higher interest rates abroad, or an expectation that the exchange rate will fall.
13. [2] A reduction in demand for the currency, which could be caused by a decrease in exports, a fall in the domestic interest rate, or a decrease in money sent home by citizens working in other countries.
14. [1] A cut in the interest rate may reduce firms' costs of production.
15. [1] This may encourage increased investment.
16. [1] It could result in total (aggregate) supply increasing more rapidly than total (aggregate) demand.
17. [1] This would reduce cost-push inflation.
18. [1] Increased imports, driven by lower interest rates, could lower total (aggregate) demand.
19. [1] This may reduce demand-pull inflation.
20. [1] Conversely, a cut in the interest rate may increase consumer spending.
21. [1] It leads to a reduced return from saving / less incentive to save.
22. [1] It also means a reduced cost of borrowing / more borrowing.
23. [1] This could increase total (aggregate) demand.
24. [1] Which could increase demand-pull inflation.