OCR A Level Economics: Central banks and financial regulation (H460) – 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 the role of the central bank and financial regulation in the financial sector area of study of the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. It is macroeconomics content with no separate stage. Every figure is invented, and Country K and Country P are illustrative. Revise first with the study guide and revision notes. See also the OCR Economics hub and the checklist.

Questions

1. Explain two functions of a central bank. [4]

2. In Country K the price index rises from 150.0 to 156.6 in one year. The inflation target is 2.0%. (a) Calculate the rate of inflation and its gap from the target. [3] (b) Explain one action the central bank might take. [1]

3. The central bank cuts its policy rate by 1.0 percentage point. Commercial banks pass on 60% to variable-rate loans. (a) Calculate the monthly saving on an interest-only loan of CU 120,000. [3] (b) Explain one reason why pass-through might be less than 100%. [2]

4. A bond pays a fixed coupon of CU 4 per CU 100 of face value. The central bank buys bonds and the market price rises from CU 100 to CU 105. (a) Calculate the change in the yield, to two decimal places. [3] (b) Explain how this could support a secondary objective of the central bank. [2]

5. A bank has risk-weighted assets of CU 600m and capital of CU 54m. (a) Calculate its capital ratio. [1] (b) The regulator raises the minimum to 12%. Calculate the capital shortfall. [2] (c) If the bank cannot raise capital, calculate the fall in its risk-weighted assets and as a percentage. [2] (d) State one benefit of the higher requirement. [1]

6. A bank has deposits of CU 500m and liquid assets of CU 60m. A rumour leads 25% of depositors to withdraw. (a) Calculate the liquidity shortfall. [2] (b) The central bank accepts collateral of CU 80m with a 15% haircut. Calculate how much it will lend and say whether this covers the shortfall. [2] (c) Calculate the interest on CU 65m borrowed for 14 days at 6% a year, to the nearest CU 100. [2]

7. Evaluate the advantages and disadvantages of a central bank acting as lender of last resort. [8]

8. Evaluate the effectiveness of an independent central bank compared with one under government control. [9]

9. A supply shock raises costs, and inflation moves well above the target while output falls. Evaluate the case for a central bank continuing to target inflation. [8]

10. A pool of mortgages worth CU 800m has a junior tranche of 6% of the pool that absorbs the first losses. The loss on each defaulted mortgage is 50%. (a) Calculate the loss if 5% of the pool defaults, and say whether the junior tranche absorbs it. [2] (b) Repeat for a default rate of 14%. [2] (c) Explain two ways in which changes in the regulation of financial institutions may contribute to a financial crisis such as 2007-08. [4]

11. Country P has a budget deficit of 8% of a GDP of CU 50bn. As a condition of a loan, an international organisation asks it to cut the deficit to 5%. Assume the cut is all in government spending and the multiplier is 1.5. (a) Calculate the fall in government spending needed and the fall in GDP. [4] (b) Evaluate the role of the IMF and the World Bank in regulating the global financial system. [5]

Answers

1. Function stated, such as monetary policy, issuing currency, banker to the government, banker to banks, lender of last resort or supervision [1]. Development of how it works, for example setting the policy rate to influence demand and inflation [1]. A second function [1]. Development, for example lending to solvent but illiquid banks to prevent contagion [1]. [4] Examiner insight: Two named functions with no explanation usually earn less than one function that is clearly developed, so give each a “which means” sentence.

2. (a) (156.6 ÷ 150.0 − 1) × 100 [1] = 4.4% [1]. Gap = 4.4 − 2.0 = 2.4 percentage points [1]. (b) Raise the policy rate, which raises borrowing costs and slows demand and price rises [1]. [4] Examiner insight: Show the formula and the unit. A bare “4.4” leaves the reader to guess whether it is a percentage or points.

3. (a) Pass-through is 1.0 × 0.60 = 0.6 percentage points [1]. Yearly saving = 120,000 × 0.006 = CU 720 [1]. Monthly = 720 ÷ 12 = CU 60 [1]. (b) Fixed-rate borrowers do not benefit until they refinance [1]. Banks may keep part of the cut to protect their margins, or because their own funding costs have not fallen [1]. [5] Examiner insight: “Banks do not pass it on” is a restatement. The reason has to say why, such as fixed rates or margins.

4. (a) Before: 4 ÷ 100 = 4.00% [1]. After: 4 ÷ 105 = 3.81% [1]. Change = a fall of 0.19 percentage points [1]. (b) Lower long-term yields reduce borrowing costs for firms and households, so investment and spending rise [1]. This raises output and employment, which supports the growth and employment objective if inflation is on target [1]. [5] Examiner insight: Say whether the yield rises or falls. A positive-looking “0.19” without “fall” can be read as a rise.

5. (a) 54 ÷ 600 = 9.0% [1]. (b) Required = 600 × 0.12 = CU 72m [1]. Shortfall = 72 − 54 = CU 18m [1]. (c) Supportable assets = 54 ÷ 0.12 = CU 450m [1]. Fall = 150m, which is 25% of 600m [1]. (d) The bank can absorb larger losses, so failure is less likely [1]. [6] Examiner insight: In part (c), identify that the bank cuts lending rather than just repeating the shortfall. This links the number to its economic effect.

6. (a) Withdrawals = 500 × 0.25 = CU 125m [1]. Shortfall = 125 − 60 = CU 65m [1]. (b) Lending = 80 × 0.85 = CU 68m [1]. This covers the CU 65m shortfall [1]. (c) 65,000,000 × 0.06 × 14 ÷ 365 = CU 149,589 [1], which is about CU 149,600 [1]. [6] Examiner insight: Give a verdict when asked “say whether”. A figure of 68 with no comment on the shortfall leaves the point unfinished.

7. Advantages: stops a run on a solvent bank spreading, because lending restores confidence [1]; protects the payment system and credit supply to firms and households [1]. Disadvantages: moral hazard, since banks expect rescue and take more risk [1], developed, for example a risky bet looks more attractive when losses are capped [1]; taxpayers bear the cost if collateral loses value [1]; in a crisis it is hard to distinguish a solvent from an insolvent bank, so support may go to a failed firm [1]. Evaluation: penalty rates, haircuts and tough regulation reduce moral hazard [1]. Judgement, for example that the benefits outweigh the costs provided the support is conditional and paired with strong regulation [1]. [8] Examiner insight: A balanced list is not yet a judgement. End with a conclusion that names the condition on which your view depends.

8. For independence: insulated from the election cycle, so no pre-election cuts [1]; credible target lowers expected inflation and wage demands [1]; expert decisions [1]. Against independence: unelected officials, a democratic deficit [1]; monetary policy may conflict with government fiscal policy [1]; may be slow to support growth if focused on inflation [1]. For control: co-ordination and direct accountability [1]. Evaluation: much depends on institutions, accountability and clarity of the target, and governments often set the target for an independent bank [1]. Judgement with a reason [1]. [9] Examiner insight: Compare the two models throughout. Writing a paragraph on each and no direct comparison tends to leave the evaluation thin.

9. For: a clear target anchors expectations so a one-off price rise does not become a wage-price spiral [1]; credibility is hard to rebuild if a target is dropped [1]; accountability continues [1]. Against: the shock is cost-push, so tight policy cuts output and employment further without removing the cause [1]; the secondary objectives suffer [1]; data are backward-looking and policy has a lag [1]. Evaluation: a flexible time horizon, or looking through a temporary shock, reduces the cost [1]. Judgement, for example the target is worth keeping if the bank explains its path and the shock is temporary [1]. [8] Examiner insight: Apply the argument to the supply shock in the stem. Generic inflation-targeting points do not use the context.

10. (a) 800 × 0.05 × 0.50 = CU 20m [1]. The junior tranche is 0.06 × 800 = CU 48m, so it absorbs the loss [1]. (b) 800 × 0.14 × 0.50 = CU 56m [1]. The loss exceeds CU 48m by CU 8m, which passes to other tranches [1]. (c) Any two, each with a link. For example: looser rules separating retail and investment banking let deposit-taking banks take on trading risk [1], so losses threatened depositors [1]. Securitisation and shadow banking sat outside capital and liquidity rules [1], so risk built up unseen and spread through the system [1]. Reliance on ratings and models is another valid pair. [8] Examiner insight: Each change needs its consequence. Naming “deregulation” alone is not an explanation.

11. (a) Deficit now = 0.08 × 50 = CU 4.0bn [1]. Target = 0.05 × 50 = CU 2.5bn, so spending falls by CU 1.5bn [1]. GDP falls by 1.5 × 1.5 = CU 2.25bn [1], which is 4.5% of GDP [1]. (b) The IMF monitors economies, lends to members with balance of payments problems and gives advice and training [1]. The World Bank provides longer-term development finance [1]. Neither supervises individual banks, which is a national task [1]. Conditionality can deepen a downturn, as in part (a) [1]. Judgement, for example their influence depends on whether governments follow advice and on the fairness of voting power, so they support rather than replace national regulators [1]. [9] Examiner insight: Use your answer to part (a) in the evaluation. It shows how the condition could affect the country, which general criticism does not.

Where marks are usually lost

• Giving a calculation without the formula, or leaving out the unit (percent, percentage points, CU).
• Using “banks do not pass it on” as the reason for incomplete pass-through, without saying why.
• Describing the lender of last resort without moral hazard, or with no judgement.
• Treating independence as meaning the government has no say.
• Applying an inflation-target argument to demand-pull inflation when the stem describes a supply shock.
• Naming deregulation without a causal chain to the crisis.
• Calling the IMF a regulator of banks.
• Not linking a number to its economic meaning, such as lending falling when capital rules tighten.

Next steps

• Review the revision notes and the study guide.
• Check the OCR Economics hub and the checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

OCR, A Level in Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021: the financial sector, covering the role of the central bank and financial regulation.