Cambridge A Level Economics: Money, banks and the money supply (9708) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover syllabus outcomes 9.4.1 to 9.4.5 (Money and banking) in the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 9 is A Level content. Country C uses the lira and Country D uses the tola. All figures are invented for illustration and are not real statistics.

Answers show each creditworthy step with a number in square brackets, and the bold figure at the end of each answer is the question total. Work each question on paper first. Links: study guide, revision notes, course hub, checklist.

Questions

1. Define money and state two of its functions. [3]

2. A village uses blocks of salt as money. The blocks differ in size and break easily. Explain two characteristics of good money that the salt blocks lack. [4]

3. In Country C (million lira): notes and coins held by the public 55; demand deposits 185; savings deposits 240; cash held in bank vaults 30.

(a) Calculate narrow money, defined as notes and coins held by the public plus demand deposits. [2] (b) Calculate broad money, defined as narrow money plus savings deposits. [1] (c) Explain why the 30 of vault cash is left out of both measures. [2]

4. In Country D, M = 250 million tola, V = 8 and T = 1,000 million transactions.

(a) Calculate the price level, P. [2] (b) M rises to 300, with V and T unchanged. Calculate the new P and its percentage change. [2] (c) With M at 300, V then falls to 6. Calculate P. [2]

5. Explain two reasons why MV = PT does not by itself show that an increase in the money supply causes inflation. [4]

6. Bank Z has cash and reserves of 81, securities of 219 and loans of 600 (million lira). It has deposits of 810 and equity of 90.

(a) Calculate its reserve ratio. [2] (b) Calculate its capital ratio, using total assets. [2] (c) A regulator raises the required capital ratio to 12%. Calculate the maximum assets Bank Z can now hold and the fall in assets it needs if equity stays at 90. [3] (d) Explain one conflict between liquidity and profitability for Bank Z. [2]

7. A new deposit of 2,000 million lira is paid into the banking system of Country C. The reserve ratio is 12.5%.

(a) Calculate the bank credit multiplier. [1] (b) Calculate the maximum total deposits and the maximum credit created. [3] (c) Give two reasons why the actual increase may be lower. [2]

8. The government of Country D has a budget deficit of 480 million tola. Explain how the effect on the money supply differs if the deficit is financed by selling bonds to (i) the non-bank public and (ii) the central bank, which assumes a reserve ratio of 8%. [6]

9. A bond pays 3 lira a year. Its price is 100 before a quantitative easing programme and 120 after it.

(a) Calculate the yield before and after. [2] (b) Evaluate the effectiveness of quantitative easing as a way of raising the money supply. [6]

10. Country D fixes its exchange rate at 3.00 tola per unit of foreign currency and has a balance of payments surplus. Net inflows of foreign currency are 40 million units.

(a) Calculate the domestic currency the central bank pays to buy the foreign currency. [1] (b) The reserve ratio is 10%. Calculate the maximum increase in deposits that this inflow could support. [2] (c) Explain how the central bank could offset the effect on the money supply, and why the exchange rate system matters. [4]

11. Assess whether credit creation by commercial banks is the most important cause of changes in the money supply in an open economy. [10]

Answers

1. Money is anything generally accepted as payment for goods and services and as settlement of debt [1]. Medium of exchange [1]. Any one other function, such as store of value, unit of account or standard of deferred payment [1]. [3] Examiner insight: A definition that names only one function, such as exchange, is incomplete; include acceptance as payment and for debts.

2. Uniformity: units must be equal in value, but blocks of different sizes are not equivalent, so prices are hard to state and compare [2]. Durability: money must last, but breaking blocks destroys value, so it fails as a store of value [2]. (Accept divisibility, with a reason linked to the context.) [4] Examiner insight: Naming a characteristic earns less than showing, in the context given, why its absence matters.

3. (a) 55 + 185 [1] = 240 million lira [1]. (b) 240 + 240 = 480 million lira [1]. (c) The money supply counts money held by the public [1]. Vault cash is the banks’ own reserve, not circulating or spent by the public [1]. [5] Examiner insight: Show the addition and state the unit; a clear definition of each measure keeps (a) and (b) consistent.

4. (a) P = MV ÷ T = (250 × 8) ÷ 1,000 [1] = 2.00 [1]. (b) P = (300 × 8) ÷ 1,000 = 2.40 [1]; percentage change = (0.40 ÷ 2.00) × 100 = 20% [1]. (c) P = (300 × 6) ÷ 1,000 [1] = 1.80 [1]. [6] Examiner insight: Write the rearranged formula first; showing the substitution lets a reader follow your method and see where a slip occurred.

5. MV = PT is an identity, so it holds by definition and does not show which variable causes another [2]. Velocity V may change, for example falling when people hoard money, so P need not rise with M; alternatively T may rise if there is spare capacity, so extra money raises output rather than prices [2]. [4] Examiner insight: A reason gains most when it names the variable that offsets the rise in M and says which way it moves.

6. (a) Reserve ratio = cash and reserves ÷ deposits = 81 ÷ 810 [1] = 10% [1]. (b) Capital ratio = 90 ÷ 900 [1] = 10% [1]. (c) Maximum assets = 90 ÷ 0.12 [1] = 750 [1]. Assets must fall by 900 − 750 = 150 million lira [1]. (d) Cash and reserves are perfectly liquid but earn no interest [1]. Moving funds into loans raises profit but makes it harder to meet sudden withdrawals [1]. [9] Examiner insight: State which ratio you use in (a) and (b), and use total assets as the question says; mixing deposits and assets is a common slip.

7. (a) 1 ÷ 0.125 = 8 [1]. (b) Total deposits = 2,000 × 8 [1] = 16,000 [1]. Credit created = 16,000 − 2,000 = 14,000 million lira [1]. (c) Any two: the public keeps some money as cash; banks hold more than the minimum reserve; weak demand for loans; capital requirements limit assets [2]. [6] Examiner insight: Remember to subtract the original deposit for credit created, and describe the figure in (b) as a maximum.

8. (i) Non-bank public: buyers pay with existing deposits, which transfer to the government [1]. When the government spends, the money returns to the public, so the money supply does not rise at the start [1]. (ii) Central bank: it creates new reserves to buy the bonds [1]. When the government spends 480, banks’ reserves rise by 480 [1]. At 8% the multiplier is 1 ÷ 0.08 = 12.5 [1], so deposits could rise by up to 480 × 12.5 = 6,000 million tola, far more than (i) [1]. [6] Examiner insight: A clear comparison needs both cases, with the buyer of the bonds named each time.

9. (a) Before: 3 ÷ 100 = 3% [1]. After: 3 ÷ 120 = 2.5% [1]. (b) The central bank buys bonds with newly created reserves [1]. This raises bond prices and lowers yields, and sellers and banks gain deposits and reserves [1], so borrowing may become cheaper and lending rise [1]. It is more effective when banks are willing to lend and firms and households want to borrow [1]. It is weaker if banks hold the reserves or demand is low after a downturn, or if the extra money mostly raises asset prices [1]. Judgement: it raises the money supply directly through deposits, but its effect on lending depends on conditions [1]. [8] Examiner insight: An evaluation point needs a condition (who lends, who borrows) and a judgement, not only a list of disadvantages.

10. (a) 40 × 3.00 = 120 million tola [1]. (b) 120 ÷ 0.10 = 1,200 million tola [1], a maximum, because the multiplier shows the greatest possible change [1]. (c) Sterilisation: the central bank sells 120 million tola of bonds [1], taking reserves out of the banks and cancelling the increase [1]. This is needed because the fixed rate obliges it to buy the foreign currency [1]. Under a floating rate the currency would appreciate and the central bank need not buy it, so the money supply would be less affected [1]. [7] Examiner insight: A surplus raises the money supply only if domestic currency is created to buy the foreign currency; say how.

11. Credit creation: banks’ lending creates deposits, and the multiplier (1 ÷ reserve ratio) makes this large; it works day to day through loans [1], and the actual size depends on loan demand and bank willingness [1]. Other causes: a central bank can add reserves by deficit financing or QE [1]; a payments surplus under a fixed rate raises reserves [1]; a deficit lowers them [1]. Analysis: these others often work through banks’ reserves and credit creation, so credit creation may be the transmission channel [2]. Evaluation: in a crisis the central bank’s actions or QE may dominate if banks do not lend [1]; in an open economy with a fixed rate, external flows could dominate [1]. Judgement: credit creation is usually the main everyday cause, but its importance depends on the exchange rate system and the central bank’s actions [1]. [10] Examiner insight: A reasoned conclusion that says which cause matters most, and under which conditions, is stronger than a list of causes.

Where marks are usually lost

• Giving the money supply as a list of causes rather than the definition asked for in a definition question.
• Leaving out the unit (million lira or tola) from final answers.
• Using the credit multiplier without calling it a maximum, or forgetting to subtract the original deposit.
• Mixing up the reserve ratio and the capital ratio.
• Treating QE as “printing money” without a chain of reasoning through yields, banks and lending.
• Giving the deficit-financing effect without saying who buys the bonds.
• Stating that a payments surplus raises the money supply without mentioning the fixed rate or intervention.
• Making an evaluation point with no condition or conclusion.

Next steps

• Re-read the study guide for any part you got wrong.
• Use the revision notes for recall.
• Take the free 10-minute diagnostics.
• Visit the course hub and checklist.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education), outcomes 9.4.1 to 9.4.5.