OCR A Level Economics: Money, banks and the determination of interest rates (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 money outcomes in the role of the financial sector topic 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 label. All figures are invented and every country, bank and firm is illustrative. Read the study guide and revision notes first. The OCR Economics hub and checklist list the other topics, and the free diagnostics help you find weak areas.

Questions

1. Explain two functions of money. [4]

2. A remote community uses fresh fish as money. Explain two characteristics of money that fresh fish fails to meet. [4]

3. A trading town has 14 goods. Calculate how many exchange rates barter requires and how many prices a money economy requires, and state the difference. [3]

4. Country B has the following holdings by the public (illustrative, m units): notes and coins 45, current account deposits 155, savings deposits 380, time deposits 120.

(a) Calculate narrow money and broad money. [2] (b) Households move 50 from savings deposits to current accounts. State the new narrow and broad money. [2] (c) Explain why cash held in bank tills is left out of the money supply. [1]

5. Households pay 2,400 units of new cash into banks. The reserve ratio is 12.5% and all loans are redeposited.

(a) Calculate the maximum total deposits. [2] (b) Calculate the maximum credit created. [1] (c) Calculate the lending in the first round. [1] (d) Households now withdraw 7.5% of each new deposit as cash and do not redeposit it. Calculate the new maximum total deposits. [2]

6. Bank C has reserves of 90 and deposits of 600. It agrees a loan of 100 and credits the borrower’s account.

(a) Describe the change to the bank’s balance sheet. [2] (b) The bank wants a 15% reserve ratio. Calculate its new ratio and the extra reserves needed. [2] (c) Explain why this order of events differs from the textbook credit multiplier. [2]

7. In Country B the demand for money is Md = 250 − 15r, where r is the interest rate in per cent. The money supply is 145.

(a) Calculate the equilibrium interest rate. [2] (b) The money supply rises to 190. Calculate the new rate. [2] (c) Explain how the rate adjusts through the bond market. [2]

8. In a loanable funds market the supply of funds is Qs = 30 + 6r and the demand is Qd = 150 − 9r.

(a) Calculate the equilibrium rate and quantity of funds. [3] (b) Demand falls to Qd = 120 − 9r. Calculate the new rate and quantity. [2] (c) Explain one cause of this fall in demand. [1]

9. A saver puts 8,000 units in an account paying 5.5%. Expected inflation is 3.5%, but actual inflation is 7%.

(a) Calculate the exact real interest rate the saver expected. [2] (b) Calculate the real rate the saver actually earned. [1] (c) Calculate the real value of the savings after one year in today’s prices and the real loss. [2]

10. (a) In Country B, M = 350, P = 3.5 and T = 800. Calculate the velocity of circulation. [2] (b) M rises 6%, V falls 1% and T rises 2%. Use the growth form of MV = PT to estimate the change in P. [1] (c) Calculate the exact change in P. [2]

11. Evaluate the relevance of the quantity theory of money. [10]

Answers

1. Any two functions, each with an explanation.

• Medium of exchange [1]: money is accepted in payment, so trade does not need each trader to want what the other offers [1].
• Store of value [1]: money keeps purchasing power until it is spent later, although inflation can erode this [1]. Other functions are equally valid if explained. [4] Examiner insight: A bare list of two terms usually gains little. Each function needs a short explanation of what money lets people do.

2. Any two characteristics, each with a reason.

• Durability [1]: fish rots quickly, so it cannot hold value over time [1].
• Uniformity [1]: fish differ in size and freshness, so units are not equal [1].
• Portability or divisibility also work if explained. [4] Examiner insight: Applying the characteristic to the fish in the stem works better than defining the characteristic in general terms.

3. Barter rates = n(n − 1)/2 = 14 × 13 / 2 [1] = 91 [1]. Money requires 14 prices, which is 77 fewer [1]. [3] Examiner insight: Show the formula before the number. A correct figure with no working is harder to credit if the figure is slightly wrong.

4. (a) Narrow = 45 + 155 = 200 [1]. Broad = 200 + 380 + 120 = 700 [1]. (b) Narrow = 200 + 50 = 250 [1]. Broad is unchanged at 700 [1]. (c) Only money in the hands of households and firms is counted. Cash sitting in a bank’s own tills is not available for them to spend [1]. [5] Examiner insight: Part (b) rewards seeing that a switch between categories changes narrow money but leaves broad money unchanged.

5. (a) Maximum deposits = 2,400 / 0.125 [1] = 19,200 [1]. (b) Credit created = 19,200 − 2,400 = 16,800 [1]. (c) First-round lending = 2,400 × 0.875 = 2,100 [1]. (d) Total leakage per round = 12.5% + 7.5% = 20% [1]. Maximum deposits = 2,400 / 0.20 = 12,000 [1]. [6] Examiner insight: In (d), adding the cash drain to the reserve ratio is the key step. Describe the result as a maximum, not a prediction.

6. (a) Loans (an asset) rise by 100 [1] and customer deposits (a liability) rise by 100 [1]. (b) New ratio = 90 / 700 = 12.9% [1]. Reserves needed = 0.15 × 700 = 105, so 15 more [1]. (c) In the textbook version a deposit arrives first and is lent on [1]. Here the loan creates the deposit, and reserves are sought afterwards, so lending depends on demand from borrowers and the bank’s willingness to lend [1]. [6] Examiner insight: Strong answers state that both sides of the balance sheet rise by the same amount, then link this to the order of events.

7. (a) 250 − 15r = 145 [1], so r = 7% [1]. (b) 250 − 15r = 190 [1], so r = 4% [1]. (c) At the old rate, people hold more money than they want [1]. They buy bonds, bond prices rise and yields fall until demand for money equals the new supply [1]. [6] Examiner insight: Name the curve that shifts. An increase in the money supply shifts the vertical supply curve right and leaves the demand curve where it is.

8. (a) 30 + 6r = 150 − 9r [1], so 15r = 120 and r = 8% [1]. Funds = 30 + 48 = 78 [1]. (b) 30 + 6r = 120 − 9r [1], so r = 6% and funds = 66 [1]. (c) Firms expect weaker sales, so they plan less investment and borrow less (any valid cause) [1]. [6] Examiner insight: Check the answer by substituting r into both equations. If supply and demand are not equal, an error has crept in.

9. (a) Exact real rate = 1.055 / 1.035 − 1 [1] = 1.93% [1]. (b) 1.055 / 1.07 − 1 = −1.40% [1]. (c) Value after a year = 8,000 × 1.055 = 8,440, and in today’s prices 8,440 / 1.07 = 7,888 [1]. Real loss = 8,000 − 7,888 = 112 [1]. [5] Examiner insight: Comment that unexpected inflation transfers value from lenders to borrowers when the rate is fixed in advance. This links the calculation to the economics.

10. (a) V = PT / M = 3.5 × 800 / 350 [1] = 8 [1]. (b) %ΔP ≈ 6 − 1 − 2 = 3% [1]. (c) 1.06 × 0.99 / 1.02 [1] = 1.0288, so P rises 2.88% [1]. [5] Examiner insight: State clearly that the estimate in (b) is approximate and the figure in (c) is exact. The two should be close.

11. A balanced answer might include the following.

• MV = PT is an identity, true by definition [1].
• It becomes the quantity theory if V is stable [1] and T is fixed at full capacity [1].
• Then P changes in proportion to M, for example a 10% rise in M raises P by 10% [1].
• For: over long periods, faster money growth tends to go with higher inflation [1], and it gives a clear policy rule [1].
• Against: V can fall, for example if M rises 10%, V falls 6% and T rises 2%, P rises only 1.4% (1.10 × 0.94 / 1.02 − 1) [1].
• Against: with spare capacity, extra money can raise output instead of prices [1].
• Against: money may follow spending if banks lend on demand, and cost-push inflation does not need money growth [1].
• Judgement: more relevant over the long run and at high inflation, less in the short run or with spare capacity [1]. [10] Examiner insight: Weigh the points rather than listing them. A conclusion that says when the theory is more or less relevant tends to read as stronger than a list.

Where marks are usually lost

• Giving the answer to a calculation with no working or no units.
• Calling the credit multiplier a fixed result instead of a maximum.
• Forgetting to add the cash drain to the reserve ratio.
• Counting a bank’s own cash in the money supply.
• Shifting the demand curve when the money supply changes.
• Treating a nominal rate as the real return.
• Using actual inflation when a lender’s decision rests on expected inflation.
• Stating that the quantity theory is right or wrong without testing the assumptions about V and T.

Next steps

• Review the revision notes and the study guide.
• Return to the OCR Economics hub and tick off topics on the checklist.
• Take the free 10-minute diagnostics to find the next topic to revise.
• Book a free trial class if you want help with any of this.

Official syllabus

OCR A Level in Economics (H460), Version 3.0 (June 2026), for first assessment in 2021, published by OCR.