In July 2016 the Sveriges Riksbank, Sweden's central bank, cut the rate of interest to 0.25%. The Swedish economy was experiencing deflation, with the weighted price index falling by 0.2% on the previous year. The fall in the rate of interest reduced the value of the krona, Sweden's currency, and was expected to end deflation.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. [2] • A measure of changes in the price level/measure of inflation (1) which takes into account the different proportions spent on items in a basket of goods and services (1).
2. [4] • A central bank is the bank of the government and commercial banks (1) whereas a commercial bank is the bank of firms and households (1).
3. • A central bank issues notes and coins (1) which a commercial bank cannot do (1).
4. • A central bank implements monetary policy measures e.g. changes in the rate of interest (1) whereas a commercial bank responds to monetary policy measures (1).
5. • A central bank is owned by the government (1) a commercial bank is usually privately owned (1),
6. [6] • A fall in the value would mean that more of the currency has to be sold to buy a given unit of another currency (1).
7. • A fall in the value of the currency would reduce export prices (1) and increase import prices (1).
8. • Demand for exports may increase/more exports (1) this may increase export revenue (1) if demand for exports is price elastic (1).
9. • Demand for imports may fall/lower imports (1) this will reduce import expenditure (1) if demand for imports is price elastic (1).
10. • A rise in export revenue and/or a fall in import expenditure will increase a trade in goods/ and services surplus (1).
11. • Trade in goods and trade in services appear in the current account (1) credit items in the current account would increase (1) while debit items would fall (1).
12. [8] Up to 5 marks for why it might:
13. • A reduction in the rate of interest will reduce the return from saving/discourage saving (1) instead of saving households may spend (1).
14. • A lower interest rate will cut the cost of borrowing (1) this may encourage households to take out loans and spend (1).
15. • Firms may spend more on capital goods/invest (1) as it will be cheaper to borrow (1) they may expect a rise in consumer expenditure (1).
16. • Higher total (aggregate) demand (1) may push up the price level (1).
17. Up to 5 marks for why it might not:
18. • Households may be pessimistic about the future/may expect prices to fall further in the future or that a recession will occur (1) and so may not spend more despite a lower interest rate (1). May choose to repay past debts (1).
19. • Firms may be pessimistic about the future/may expect prices to fall in the future (1) and so may not borrow/ invest more despite a lower interest rate (1).
20. • The interest rate may initially have been low (1) and so a cut may make little difference (1).
21. • Households and firms may not expect the cut to last (1) and so will not alter their spending and investment plans (1).
22. • Banks may be reluctant to lend (1) may be a lack of credit worthy borrowers (1).
23. Note: not rewarding other policy measures.