WJEC A Level Economics
WJEC A Level Economics Monetary Policy Exam Questions
Free WJEC A Level Economics revision for Monetary Policy: what you need to know, common mistakes and exam-style questions with answers. Covers the monetary framework, interest rates, monetary stability, quantitative easing, direct intervention, financial stability, asset bubbles and financial regulation.
Practise Monetary Policy with past papers
Once you have learnt this topic, find the Monetary Policy questions in real WJEC A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About WJEC A Level Economics Monetary Policy
Monetary policy is covered at AS and A2 in WJEC Economics. At AS you study the framework (the Bank of England, its independence and the symmetrical inflation target), the operation of monetary policy and monetary stability, and how interest rates affect the economy. At A2 you add quantitative easing, direct intervention such as funding for lending, and financial stability: the growth of the UK financial sector, asset bubbles, the 2007 to 2008 financial crisis and the role and purpose of regulation. Examiners expect a full transmission chain from Bank Rate to AD and inflation, and balanced evaluation of unconventional policy. It is a strong essay area in A2 Unit 4.
What you need to know
- Framework The Bank of England is independent and is responsible for monetary and financial stability. The government sets a symmetrical inflation target, and the Bank sets Bank Rate to achieve it. It is also lender of last resort.
- Interest rates A cut in Bank Rate reduces borrowing costs and the reward for saving, raising consumption and investment, cutting mortgage costs, raising asset prices and possibly weakening the pound, which boosts net exports. AD shifts right.
- Quantitative easing (A2) The Bank creates money to buy government bonds and other assets, raising their prices, lowering long term interest rates and increasing liquidity, to stimulate spending when Bank Rate is close to zero. Its impact, risks and eventual reversal must be evaluated.
- Direct intervention (A2) Schemes such as Funding for Lending provided banks with cheap funding linked to their lending to households and businesses, aiming to unblock credit.
- The financial sector (A2) The UK financial sector has grown in size and influence. It provides credit, insurance and payment services and earns export revenue, but its problems can spread quickly to the real economy.
- Asset bubbles and the 2007 to 2008 crisis (A2) Cheap credit and speculation can push asset prices far above underlying values. When the US housing bubble burst, bank losses spread globally, credit dried up and a deep recession followed.
- Regulation (A2) Regulation aims to reduce excessive risk taking and moral hazard, for example through higher capital and liquidity requirements, protecting depositors and the wider economy.
Common mistakes in Monetary Policy
- Saying the Chancellor sets interest rates. The Bank of England sets Bank Rate independently.
- Writing that QE means printing banknotes for people to spend. QE is the creation of central bank reserves to buy assets.
- Missing out steps in the transmission mechanism. Link interest rates to spending, then to AD, then to output and inflation.
- Ignoring the limits of monetary policy. When confidence is low, cheaper borrowing may not raise spending.
- Discussing financial stability without the real economy. Explain how financial problems affect lending, investment and jobs.
Try three Monetary Policy exam-style questions
1. State two functions of the Bank of England. (2 marks)
Show the mark scheme answer
Any two from: setting Bank Rate to meet the inflation target; acting as lender of last resort; maintaining financial stability; issuing banknotes; acting as banker to the government.
2. Explain how a cut in Bank Rate might increase investment. (3 marks)
Show the mark scheme answer
Borrowing becomes cheaper so the cost of financing projects falls; more projects are expected to be profitable; firms may also expect higher consumer demand, so investment rises.
3. Evaluate the effectiveness of quantitative easing in stimulating the UK economy. (15 marks)
Show the mark scheme answer
A strong answer would explain the transmission of QE through bond prices, lower long term interest rates, wealth effects and bank liquidity; evaluate that banks may not lend, confidence may be low, gains go mainly to asset holders, it risks asset bubbles and later inflation, and reversal is uncertain; consider that it helped avoid deeper recession after 2008; reach a judgement.
Monetary Policy FAQs
What does WJEC A Level Economics Monetary Policy cover?
At AS it covers the monetary framework, monetary stability and interest rates. At A2 it adds quantitative easing, direct intervention and financial stability, including asset bubbles and the purpose of regulation.
Which unit is Monetary Policy examined in?
The AS parts are examined in AS Units 1 and 2, and the A2 parts in A2 Units 3 and 4. Unit 4 assesses all A level content.
What example should I use for financial stability?
Use the 2007 to 2008 financial crisis to show how an asset bubble, risky lending and bank losses spread to the real economy, and why regulation was strengthened afterwards.
