A LevelEconomicsAQAExam QuestionsThe National & International Economy12. Financial Markets & Monetary Policy

Financial Markets & Monetary Policy (AQA A Level Economics): Exam Questions

Exam code: 7136

2 hours29 questions

Select a download format for 12. Financial Markets & Monetary Policy

Scroll for more

Select an answer set to view for
12. Financial Markets & Monetary Policy

1
Sme Calculator1 mark

A long-dated £100 government bond with a coupon rate of 5% has a current market value of £125.  This implies that the

  • current yield on the bond is 4%.

  • current yield on the bond is 5%.

  • market rate of interest is 2.5%.

  • market rate of interest is 5%.

Choose your answer

21 mark

All other things being equal, in which one of the following circumstances is the Bank of England most likely to raise Bank Rate to maintain financial stability?

  • A fall in bank liquidity and capital ratios following several years of rapid growth in bank lending and a boom in house prices

  • An increase in the government’s target for the rate of inflation following a significant increase in the rate of productivity growth

  • An increase in the savings ratio as the economy recovers from a recession

  • A rise in share prices on global stock markets due to the growth in world trade

Choose your answer

3
Sme Calculator1 mark

Table 2 shows the inflation rate and the rate of growth of the money supply for an economy between 2016 and 2019.

Table 2 

Year

Inflation

Rate of growth of money supply

2016

3.1%

3.5%

2017

3.5%

3.3%

2018

2.9%

3.2%

2019

2.5%

2.0%

 From the data in Table 2 it may be concluded that, all other things being equal, there was

  • a fall in the value of money throughout the entire period.

  • a policy of quantitative easing in operation throughout the entire period.

  • an inverse relationship between inflation and the rate of growth of the money supply.

  • continuous disinflation throughout the entire period.

Choose your answer

41 mark

Moral hazard results when individuals and organisations make investment decisions

  • based on asymmetric information.

  • because they expect to make a large profit.

  • based on the returns made on previous investments.

  • knowing that others will bear the loss if things go wrong.

Choose your answer

5
Sme Calculator1 mark

A company has an issued share capital of £1 million and an outstanding corporate bond issue of £200 000. To fund its expansion, the company issues additional corporate bonds for £300 000. All other things being equal, after the issue of the additional corporate bonds the ratio of the company’s total debt to its equity will be

  • 0.2:1

  • 0.3:1

  • 0.5:1

  • 2.0:1

Choose your answer

61 mark

Despite its central bank operating a policy of quantitative easing for several years, an economy has rising unemployment and a rate of inflation significantly below the target rate set by the government. All other things being equal, which one of the following actions is the central bank most likely to take in order to meet the target for inflation?

  • A policy leading to an appreciation of the exchange rate.

  • An increase in its base rate of interest and the reversal of its quantitative easing policy.

  • Providing forward guidance indicating that the bank will continue with its programme of quantitative easing.

  • Selling some of its stock of government bonds to other financial institutions.

Choose your answer

71 mark

In recent years, several central banks around the world have implemented a policy of quantitative easing (QE). All other things being equal, which one of the following combinations A, B, C or D, is most likely to be the result of this policy?

 

Bank liquidity

Bond prices

Long-term interest rates

A

Decrease

Fall

Rise

B

Increase

Fall

Rise

C

Decrease

Rise

Fall

D

Increase

Rise

Fall

    Choose your answer

    81 mark

    A large, unexpected decline in house prices could lead to a systemic crisis in the financial system. 

    This is most likely to happen if, following the fall in house prices, commercial banks and building societies

    • have a low ratio of capital to their total assets.

    • have followed Prudential Regulation Authority (PRA) guidance to reduce the amount they lend to high-risk borrowers.

    • have the option to use the Bank of England as the lender of last resort.

    • hold a high proportion of liquid assets on their balance sheets.

    Choose your answer

    91 mark

    The diagram below shows two aggregate demand (AD) curves, two short-run aggregate supply (SRAS) curves, and the long-run aggregate supply (LRAS) curve for an economy.

    q25-june-2018-aqa-a-level-economics

    The increase in the price level from P1 to P2 raises the rate of inflation above the target rate set by the government. In an attempt to bring inflation back to its target rate, the central bank announces a change in interest rates. Other things being equal, this is most likely to

    • create upward pressure on the exchange rate.

    • increase bond prices.

    • make business loans more affordable.

    • reduce the cost of servicing the national debt.

    Choose your answer

    101 mark

    A bank makes a new loan to a customer. All other things being equal, which combination of events, A, B, C or D, shows what will happen?

     

    Bank’s liabilities

    Bank’s assets

    Money supply

    A

    Increase

    Increase

    Increases

    B

    Increase

    Fall

    Increases

    C

    Fall

    Increase

    Falls

    D

    Fall

    Fall

    Falls

      Choose your answer

      11
      Sme Calculator      1 mark

      A government issued bond has a nominal value of £100 and the annual coupon is £6. The bond has 35 years until maturity. Its current yield is 5%. The current market price of the bond is

      • £100

      • £105

      • £106

      • £120

      Choose your answer

      121 mark

      Which one of the following combinations, A, B, C or D, best distinguishes between the functions of the money market and the capital market?

       

      Money market

      Capital market

      A

       

      The market for issuing new shares

       

      The market where foreign currency is exchanged at some point in the future

      B

      The market where commercial banks provide short-term loans to each other

      The market where businesses obtain funds to finance long-term growth

      C

       

      The market where foreign currencies are traded

      The main market in which commercial banks lend to each other

      D

      The market where the government finances its budget deficit by issuing bonds

      The market where short-term debt is converted into equity finance

        Choose your answer

        131 mark

        Table 2 contains a simple balance sheet for a bank.

        Assets (£ billion)

        Liabilities (£ billion)

        Cash 20

        Customer Deposits 700

        Cash held at Central Bank 70

        Money owed to Central Bank 30

        Securities held 130

        Money owed to other banks 170

        Loans 730

        Shareholders Equity 100

        Other assets 50

        Total assets 1000

        Total liabilities 1000

        From the balance sheet it can be concluded that this bank is

        • a threat to financial stability because it holds no capital.

        • an investment bank because it holds non-interest bearing cash.

        • earning large profits because most of its assets are loans.

        • most likely to be a commercial bank because its main liabilities are customer deposits.

        Choose your answer

        141 mark

        The Bank of England’s Monetary Policy Committee increases Bank Rate to reduce the risk of an increase in inflationary pressure in the economy. All other things being equal, which one of the following is most likely to result from the policy change?

        • Consumption will increase since house prices will rise and increase wealth.

        • Investment will increase as the return on investment projects rises.

        • Savings will increase as interest rates rise in real terms.

        • The exchange rate will fall as a result of increased capital inflows

        Choose your answer

        151 mark

        The money market is the financial market in which

        • companies issue new shares to the public and financial institutions

        • dealers are able to trade foreign currencies.

        • long-term company securities and government bonds are traded.

        • short-term finance is provided for companies and governments.

        Choose your answer

        161 mark

        The price of a government bond was £10 000 when it was issued. The bond does not have a maturity date and the government is not intending to buy back the bond. The bond pays £200 per year to the bond holder and has a market price of £8 000.

        Which one of the following fractions represents the yield on the bond?

        • 1 over 50

        • 1 over 40

        • 1 fifth

        • 4 over 5

        Choose your answer

        171 mark

        A central bank has raised interest rates as part of monetary policy.

        Which one of the following policy objectives is this most likely to assist the government in achieving?

        • A more equitable distribution of income

        • Bringing down the rate of inflation

        • Increasing the rate of economic growth

        • Minimising the rate of unemployment

        Choose your answer

        181 mark

        The quantity theory of money can be explained using Irving Fisher’s equation of exchange, MV=PQ. Monetarist economists believe that the theory helps to explain inflation because some parts of the equation are normally stable.

        Which parts of the equation do monetarist economists normally consider to be stable?

        • M and P

        • M and V

        • P and Q

        • V and Q

        Choose your answer

        191 mark

        Systemic risk is most likely to occur in financial systems when

        • investment banks have low capital-output ratios.

        • most banks carry out both commercial and investment banking activities.

        • the central bank acts as lender of last resort to financial institutions.

        • the commercial banks have high liquidity ratios.

        Choose your answer

        201 mark

        Which one of the following is a policy that the Bank of England is most likely to undertake if it wants to increase the money supply?

        • Increase its purchases of government securities

        • Increase market interest rates by increasing Bank Rate

        • Increase the capital ratio required of commercial banks

        • Increase the liquidity ratio required of commercial banks

        Choose your answer

        211 mark

        Table 5 contains figures from the balance sheet of a commercial bank.

        Table 5

        item

        Value (£ bn)

        Cash

        45

        Share capital

        100

        Loans advanced

        135

        Fixed assets

        115

        Long-term liabilities

        85

        Investments

        50

        Reserves (retained profit)

        30

        Balances at the central bank

        25

        Deposits and other liabilities

        185

        Other liquid assets

        30

        What is the value of this bank’s total liquid assets?

        • £70 bn

        • £100 bn

        • £130 bn

        • £175 bn

        Choose your answer

        221 mark

        In an economy, an index showing the change in the money supply multiplied by the velocity of circulation increases from 100 to 115.5. At the same time, the final output produced by the economy increases from 100 to 110.

        According to Fisher’s equation of exchange, the price level will increase by

        • 5%

        • 5.5%

        • 10%

        • 15.5%

        Choose your answer

        231 mark

        Which one of the following is an example of moral hazard resulting from the regulation of a financial system?

        • Asymmetric information may lead bank customers to take out loans they cannot repay

        • Banks may engage in more risky lending if they believe the central bank will support them in a crisis

        • Banks may experience lower profits if the central bank imposes high capital requirements

        • Regulations imposed by the central bank may make it harder for low-income groups to get loans

        Choose your answer

        241 mark

        Which one of the following functions of money is likely to be most effective during a period of deflation?

        • Measure of value

        • Standard of deferred payment

        • Store of value

        • Unit of account

        Choose your answer

        251 mark

        Following a reduction in the level of cash reserves required by the regulator, a commercial bank increases its mortgage lending.

        Which one of the following describes how the bank’s liquidity and profitability are most likely to change?

        • Liquidity and profitability both improve

        • Liquidity and profitability both worsen

        • Liquidity improves and profitability worsens

        • Liquidity worsens and profitability improves

        Choose your answer