In 2015 some German commercial banks reduced their already very low interest rates on deposit accounts. The German Government was hoping that such a change would encourage more Germans to buy shares in German firms. The ability of German firms to buy capital goods would be increased if they could sell more shares or borrow more from commercial banks.

Mark scheme

Marking points from the official mark scheme (May/June 2017). The mark or mark type is shown in brackets.

1. [1] (a) Central bank: owned by the government
2. [1] (a) Central bank: objective is to create price stability
3. [1] (a) Central bank: only one in a country
4. [1] (a) Central bank: issues note and coins
5. [1] (a) Central bank: operates monetary policy/sets the rate of interest (base rate)
6. [1] (a) Central bank: intervenes in foreign exchange markets to influence the exchange rate
7. [1] (a) Central bank: lender of last resort to governments
8. [1] (a) Central bank: supervises and regulates the financial system
9. [1] (a) Commercial bank: owned by shareholders/privately owned
10. [1] (a) Commercial bank: objective is to make a profit
11. [1] (a) Commercial bank: there are usually many commercial banks in a country
12. [1] (a) Commercial bank: exchanges foreign currency
13. [1] (a) Commercial bank: accepts deposits from households and firms
14. [1] (a) Commercial bank: lends to households and firms
15. [1] (a) Commercial bank: provides insurance services to households and firms
16. [1] (b) The (next) best alternative
17. [1] (b) forgone/sacrificed
18. [1] (b) Instead of buying shares people may buy something else
19. [1] (b) example of what the money may be used for instead e.g. putting money in a bank/buying other goods and services
20. [1] (c) A fall in the rate of interest may increase demand/spending
21. [1] (c) increasing the demand for imports
22. [1] (c) the higher demand may result in products being diverted from the export market to the domestic market
23. [1] (c) increased spending on imports will increase the supply of the domestic currency
24. [1] (c) lower revenue from exports will reduce the demand for the domestic currency
25. [1] (c) price of currency will fall
26. [1] (c) A fall in the rate of interest may discourage foreigners from putting money into the country's banks
27. [1] (c) this will reduce demand for currency
28. [1] (c) some domestic residents may decide to move funds abroad
29. [1] (c) this will increase the supply of the currency
30. [1] (c) the price of the currency will fall
31. [1] (c) A fall in the rate of interest may encourage firms to invest/attract foreign firms to invest in the country
32. [1] (c) spend more on capital goods
33. [1] (c) increase efficiency
34. [1] (c) increase exports
35. [1] (c) increase demand for the currency
36. [1] (c) raise exchange rate
37. [1] (d) Higher spending on capital goods/investment: may increase total demand
38. [1] (d) raise productivity
39. [1] (d) and increase total supply/productive potential/output
40. [1] (d) resulting in economic growth
41. [1] (d) may reduce costs of production
42. [1] (d) introduce new technology
43. [1] (d) may improve the quality of products
44. [1] (d) may make products more internationally competitive
45. [1] (d) increasing exports
46. [1] (d) improving the current account position
47. [1] (d) may mean firms will need more workers e.g. to operate machinery
48. [1] (d) reducing unemployment
49. [1] (d) may raise productivity
50. [1] (d) reducing unit costs of production
51. [1] (d) which may lead to a reduction in the average price level
52. [1] (d) leading to lower inflation
53. [1] (d) may increase tax revenue
54. [1] (d) which could enable the government to re-distribute income from the rich to the poor
55. [1] (d) Capital goods may not be used
56. [1] (d) leaving output unchanged
57. [1] (d) Capital goods may replace workers
58. [1] (d) causing unemployment
59. [1] (d) Other countries may spend more on capital goods
60. [1] (d) making the country less internationally competitive
61. [1] (d) increasing a current account deficit
62. [1] (d) In the short run, higher spending on capital goods may increase total demand
63. [1] (d) causing inflation
64. [1] (d) In the short run, producing more capital goods may be achieved with an opportunity cost
65. [1] (d) of fewer consumer goods