How far apart are the exact and rough forms?

With low inflation the gap is small, usually within 0.1 percentage point; if a question gives exact figures, always use the exact form.

Why do excess reserves weaken policy?

Because part of the reserves is not lent out, the effective multiplier falls, so the same open market operation produces a smaller deposit increase.

S6 Economics | Monetary Policy Practice Paper 2 (Intermediate)

2026-11-04

Tutor Prep Guide · Secondary Economics

Put the multiplier into real settings: reserve ratio changes, bond sales that drain liquidity, switching between nominal and real rates, and what happens to prices when money grows faster than output.

Attempt first, mark afterwards　Allow thirty to thirty-five minutes; for rate items always write the Fisher expression first, then decide between the exact and the additive form.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10 items
Suggested time	About 35 minutes
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S6 Economics \| Monetary Policy
Level	S6 (Secondary 6) Economics

02　Questions (10 items)

FoundationThe required reserve ratio is 12.5% and banks hold no excess reserves. What is the simple deposit multiplier?
FoundationContinuing from the previous item, with 240 billion of reserves, how many billion of deposits can be supported at most?
FoundationWhat is the main difference between M2 and M1?
FoundationThe central bank raises the discount window rate. Is that expansionary or contractionary policy?
IntermediateThe central bank sells 80 billion of bonds, the required reserve ratio is 12.5% and there are no excess reserves. By how much can the money supply contract at most?
IntermediateInflation is 3% against a 2% target. Should policy be expansionary or contractionary, and which two tools fit?
IntermediateThe real interest rate is 2% and expected inflation is 3%. What is the nominal interest rate?
ChallengeThe money supply rises from 800 billion to 880 billion, velocity is unchanged and real output grows only 2%. By roughly what percentage does the price level rise?
ChallengeThe central bank buys 200 billion of bonds and the required reserve ratio is 12.5%. If banks hold no excess reserves and the public holds no extra cash, by how much can deposits rise at most? If banks in fact hold 25% excess reserves, is the actual rise larger or smaller?
Error redoError review: a student described a central bank rate cut as expansionary fiscal policy. How should it be corrected?

03　Answers and one-line notes

#	Answer	One-line note
1	8	1 / 0.125 = 8; the lower the reserve ratio, the more deposits a given amount of reserves can support.
2	1,920.0 billion	240 x 8 = 1,920.0; this is the final deposit total before any cash leakage is considered.
3	M2 adds savings and time deposits to M1	M2 is broader than M1 and includes quasi-money, namely savings and time deposits; both count only holdings of the public and exclude cash held by banks.
4	Contractionary	Banks face a higher cost of borrowing reserves from the central bank, so they borrow less, which contracts reserves and the money supply; it is one of the contractionary tools.
5	640.0 billion	80 x 8 = 640.0; selling bonds drains reserves and the multiplier of 8 magnifies the contraction.
6	Contractionary; raise interest rates and sell bonds, and raising the required reserve ratio also works	When inflation is above target, demand must be curbed by draining liquidity and cooling aggregate demand so that price growth eases, rather than waiting for inflation to vanish by itself.
7	About 5.06%	(1 + 0.02) x (1 + 0.03) – 1 = 5.06%; simply adding gives 5%, and the exact form is slightly higher because the cross term matters.
8	About 7.8%	(880.00 / 800.00) / 1.02 – 1 = 7.8%; the part of money growth that exceeds output growth ends up in prices.
9	Up to 1,600.0 billion in theory; the actual rise is smaller	200 x 8 = 1,600.0; excess reserves sit idle, so the effective multiplier falls and the actual increase stays below the theoretical ceiling.
10	A rate cut is monetary policy; fiscal policy is government taxation and public spending	The two have different actors: monetary policy uses interest rates, reserve requirements and open market operations, while fiscal policy uses taxes and spending, and the two can pull in the same or opposite directions.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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