Monetary Policy: three questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 1
A country has a target rate of inflation of 2.5% and has recently experienced the actual rate rising to 6%, with unemployment falling to very low levels.
Which policy option is most likely to be implemented?
Answer: D.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 2
Japan is suffering from deflation. Which government policy would not help to overcome this problem?
Answer: A.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 3
A government wants to use an expansionary monetary policy. What should the government increase?
Answer: D.
Explanation:
1. Expansionary monetary policy aims to stimulate economic growth by increasing the money supply in the economy, which can lead to lower interest rates, increased borrowing, and higher levels of investment and consumption.
2. Increasing credit regulations (option A) would be a contractionary measure, as it would restrict the availability of credit to borrowers, leading to a decrease in spending and economic activity.
3. Increasing the exchange rate (option B) typically involves a central bank intervening in the foreign exchange market to strengthen the domestic currency relative to other currencies. While a stronger currency can have some benefits, such as making imports cheaper, it is not typically a primary tool used in expansionary monetary policy.
4. Increasing the interest rate (option C) is a contractionary measure as it makes borrowing more expensive, which can reduce investment and consumption in the economy. Expansionary monetary policy usually involves lowering interest rates to encourage borrowing and spending.
Therefore, the government should increase the money supply (option D) to implement an expansionary monetary policy.
What this practice covers
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on monetary policy, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Confusing monetary policy (central bank, interest rates) with fiscal policy (government, tax and spending).
- Assuming rate cuts always boost AD, ignoring lags, confidence and the liquidity trap.
- Recommending monetary policy for cost-push inflation without qualification.
- Stating the outcome ("AD rises") without tracing the transmission mechanism that earns the analysis marks.
- Forgetting the exchange-rate channel, which is often the fastest-acting one.
- Working in nominal rates when the real rate is what drives behaviour.
- Describing QE as "printing money to give to the government" rather than as asset purchases that lower yields.
- Treating the effect as certain, when it depends on the multiplier and on spare capacity.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Monetary Policy revision notes.