In February 2017, China's central bank raised the rate of interest. It wanted to reduce borrowing and the growth of the money supply, but it was worried that the rise in the interest rate might reduce the country's economic growth rate. The change in interest rate is likely to have increased the workload of skilled commercial bank workers.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. 8 Medium of exchange
2. 8 Store of value
3. 8 Unit of account (measure of value)
4. 8 Standard of deferred payments
5. It may want to reduce the inflation rate (1) caused by too much demand arising from borrowing (1).
6. To reduce disposable income (1) and reduce (demand-pull) inflation (1).
7. it may want to reduce a current account deficit (1) people may be spending too much on imports (1).
8. Over lending by commercial banks (1) puts banking system at risk (1).
9. The demand for skilled workers is likely to be higher (1) due to their higher productivity / education (1) expectation of a higher rate of return / sales (1) better quality goods and services (1) resulting in greater profits (1).
10. The supply of skilled workers is likely to be lower / more inelastic (1) due to the shortage of people with skills / qualifications (1).
11. Skilled workers may have more bargaining power (1) harder to replace / may cause more disruption by taking industrial action (1).
12. Up to 5 marks for why it might:
13. It may discourage spending (1) as it would be more expensive to borrow (1) more rewarding to save (1) this will lower total (aggregate) demand (1) which could reduce firms' output (1).
14. It may discourage investment (1) as more expensive to borrow (1) firms decide to save the money (1).
15. Higher interest rate may cause exchange rate to rise (1) discouraging exports / encouraging imports (1).
16. Up to 5 marks for why it might not:
17. People / firms may still be prepared to borrow if they are optimistic about the future (1) thinking they will be able to repay (1) because they expect e.g. higher income in the future (1).
18. The rate of interest may still be low (1) and may be below the inflation rate (1).
19. A higher rate of interest may reduce inflation (1) this could make domestic products more price-competitive (1) and so increase exports (1).
20. Government spending (1) increased exports (1) may offset reductions in consumption and investment resulting in higher economic growth (1).