IGCSE Cambridge (CIE) Economics 50 mins 14 questions

Paper 2

3.1 Money & Banking

Understanding Money / Central & Commercial Banks

Easy (7 questions) /14 Scan here for your answers

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Medium (4 questions) /18

Hard (3 questions) /18

Total Marks /50

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Easy Questions
1 Tanzania is a low-income country with relatively high import tariffs. Between 2012 and
2015, Tanzania experienced a high economic growth rate. This allowed the government
to provide more public goods. The government also increased its investment in the merit
goods of education and healthcare. Tanzania’s central bank influenced household
borrowing and spending with the aim of achieving price stability. As a result the country’s
inflation rate fell, with money losing less of its value.

Identify two characteristics of money.

(2 marks)

2 Italy is home to the world’s oldest bank and some of the world’s oldest car producers.
Internationally, both industries are facing a number of challenges. The wages of bank
workers and car workers are increasing. Demand for bank loans and for cars is changing,
in part, due to changes in population size. It is predicted that the price elasticity of
demand (PED) for cars will also change in the future.

State two functions of a commercial bank.

(2 marks)

3 It was announced in November 2016 that 500 and 1000 rupee banknotes could no
longer be used in shops in India. These were replaced by the central bank, an institution
that makes extensive use of division of labour. In India, cash is still an important form of
money used in economic transactions. The replacement of banknotes put pressure on
banking staff and other workers in the tertiary sector, and affected the general price
level.

State two functions, other than issuing banknotes and coins, of a central bank.

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 (2 marks)

4 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.

Identify two functions of money.

(2 marks)

5 Identify, using information from the extract, two functions of a commercial bank.

Refer to the source material in your answers.

(2 marks)

6 In February 2016, share prices on stock exchanges fell throughout the world. There were
a number of reasons for this; including concerns about the slowdown in world growth,
the possibility of deflation and unemployment, and fears that some commercial banks
could go out of business.

Define commercial bank.

(2 marks)

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7 In early 2016, the central bank of the Republic of Turkey cut interest rates five times. This
was despite an inflation rate of 7.6%. The economy had a combination of a low saving
rate and weak investment. To stimulate economic growth the Turkish government
announced a package of reforms including subsidies for research and investment.

Identify two functions of a central bank.

(2 marks)

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Medium Questions
1 The Monetary Authority of Singapore (MAS), the government body which controls the
monetary policy of the country, has allowed the Singapore dollar to appreciate. However,
the high cost of the Singapore dollar has created a need for new incentives for firms,
such as a reduction in taxes and granting subsidies.

Explain two functions of money.

(4 marks)

2 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.

Explain two reasons why a central bank may want to reduce borrowing.

(4 marks)

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3 Mexico has recently experienced relatively low inflation and the Mexican government
wants to maintain this price stability. Despite this its currency has fallen in value with
each Mexican peso exchanging for less foreign currency. The government is also trying to
reduce pollution in the country. One key cause of pollution in Mexico is car travel. Driving
has both private and external costs.

Analyse how a high rate of inflation affects the functions of money.

(6 marks)

4 The Monetary Authority of Singapore (MAS), the government body which controls the
monetary policy of the country, has allowed the Singapore dollar to appreciate. However,
the high cost of the Singapore dollar has created a need for new incentives for firms,
such as a reduction in taxes and granting subsidies.

Explain two characteristics of good money

(4 marks)

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Hard Questions
1 Discuss whether or not a central bank should reduce commercial bank lending.

Refer to the source material in your answers.

(5 marks)

2 Discuss the advantages and disadvantages of the activities of commercial banks to an

economy.

Refer to the source material in your answers.

(5 marks)

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3 In 2016, the world shortage of peanuts increased their price. China, which has
traditionally been a net exporter of peanuts, was about to become a net importer. South
Africa, which is an exporter of high-quality, high-cost peanuts used in chocolate
confectionery, experienced the worst drought on record. A higher number of South
African farmers applied for bank loans in the same year.

Discuss whether or not a central bank should limit the amount that a commercial bank
can lend to its customers.

(8 marks)

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