Financial Markets and Monetary Policy | AQA A-Level Economics (7136)
Financial Markets and Monetary Policy
- 204 questions
- 15 subtopics
- Paper 2: The national and international economy, and available on Paper 3
- Paper 2 and Paper 3
Financial markets and monetary policy is examined on Papers 2 and 3.
It covers money and the markets that move it, what banks do and the risks they run, then the Bank of England's policy and how a change in bank rate reaches the real economy.
Sample questions from Financial Markets and Monetary Policy
Answer each one closed book first, then open the answer.
-
The characteristics and functions of money
Why must money possess acceptability?
Show the answer
Acceptability means money must be widely recognised and accepted by people as a means of payment for goods and services. -
Financial markets and their role
How do financial markets provide liquidity?
Show the answer
Financial markets provide liquidity by allowing assets to be converted into cash quickly and at low cost. -
Commercial banks, investment banks and the balance sheet
What is one of the main functions of a commercial bank relating to customers' money holdings?
Show the answer
Accepting deposits from customers. -
Liquidity, profitability, security and credit creation
What happens to the portion of a deposit that a bank does not hold as reserves?
Show the answer
The bank lends out the remainder to borrowers. -
How bank rate changes affect the economy
What is the overall effect of a rise in bank rate on aggregate demand?
Show the answer
Aggregate demand falls due to reduced consumption and investment. -
What the MPC considers, and the exchange rate channel
How can an appreciation of the exchange rate help reduce inflation?
Show the answer
Cheaper imports lower the cost of imported goods and raw materials, reducing cost-push inflationary pressure. -
The bank rate and the MPC's decisions
Under what economic conditions would the MPC consider lowering bank rate?
Show the answer
When inflation is below target or the economy is in recession. -
Exchange rate movements and the macroeconomy
What effect does a depreciation tend to have on the current account balance?
Show the answer
It tends to improve the current account balance by boosting exports and reducing imports.
The 15 subtopics
One subtopic is one session. Work down the list.
| Subtopic | What it covers | Questions |
|---|---|---|
| The characteristics and functions of money | Durability, portability, divisibility and acceptability, and the four functions money performs. | 10 |
| Financial markets and their role | The money, capital and foreign exchange markets, and how markets channel funds and price risk. | 8 |
| Debt, equity and bond yields | How debt differs from equity, calculating a bond yield, and why yields and bond prices move opposite ways. | 19 |
| Commercial banks, investment banks and the balance sheet | What each type of bank does, and which items are assets and which liabilities. | 14 |
| Liquidity, profitability, security and credit creation | The conflict between a bank's three objectives, and how the banking system creates credit. | 12 |
| The instruments and institutions of monetary policy | Interest rates, the money supply, credit and the exchange rate as the instruments of policy. | 10 |
| How bank rate changes affect the economy | What a rise or fall in bank rate does to borrowing, saving, consumption, investment and aggregate demand. | 10 |
| What the MPC considers, and the exchange rate channel | The data behind an interest rate decision, and how the exchange rate carries policy into the economy. | 21 |
| The functions of a central bank | Banker to the government, lender of last resort, issuer of notes and setter of monetary policy. | 13 |
| The bank rate and the MPC's decisions | The inflation target, who sets bank rate, and the conditions for raising or lowering it. | 17 |
| Exchange rate movements and the macroeconomy | What depreciation and appreciation do to net exports, inflation, the current account and employment. | 14 |
| The monetary policy transmission mechanism | The interest rate, exchange rate, asset price and expectations channels. | 18 |
| Quantitative easing and unconventional policy | Open market operations, reserve requirements, QE and forward guidance. | 11 |
| The regulators and the risks banks face | The Bank of England, PRA, FPC and FCA, and the liquidity and credit risk that come with maturity transformation. | 11 |
| Liquidity ratios, capital ratios and systemic risk | How the ratios protect stability and what they cost, moral hazard, and how a crisis spreads. | 16 |
How the guide is worked
Answering a question from memory stores it far better than reading the answer again. The guide runs that as a fixed procedure on one subtopic at a time, about twenty minutes a session.
-
Step 1 · Closed book
Cover the answers. Work through one subtopic and write down what you can. Leave blanks where you have nothing.
-
Step 2 · Open book
Go back to the top. Read each printed answer and write it out in full, including the ones you had right.
-
Step 3 · Closed book again
Same questions, same order, from memory. The gap between pass one and pass three is the session result.
Read the full method, the return schedule and the research behind it.
Nearby topics
AQA A-Level Economics Active Recall Guide
Every topic, not just this one. 2,344 questions with their answers.