S6 Economics: Money Supply And Credit Creation (Paper 2: Intermediate)

S6 Economics: Money Supply and Credit Creation (Paper 2: intermediate)

2026-11-13

S6 Economics: Money Supply and Credit Creation (Paper 2: intermediate)

This second paper adds the leakages: the layers of M2 and M3 and the way a currency drain and excess reserves push the actual multiplier down.

Direct answers　Whenever a question says actual, add the leakages to the ratio, and state explicitly that the drain is taken as zero when it is not given.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10
Suggested time	20
Difficulty mix	Foundation 3 · Intermediate 3 · Challenge 3 · Error redo 1
Chapter	Chapter: S6 Economics: Money Supply and Credit Creation
Level	S6 Economics

02　Questions (10 items)

FoundationWhat is added to M1 to form Hong Kong M2?
FoundationWhat does a larger currency drain, that is more cash held by the public, do to credit creation?
FoundationWhat are excess reserves?
IntermediateWith a 20 per cent required ratio and a 10 per cent currency drain relative to initial deposits, what is the actual deposit multiplier?
IntermediateWhat is added to M2 to form Hong Kong M3?
IntermediateIf the public holds more cash and banks hold more excess reserves, what happens to the money supply when the monetary base is unchanged?
ChallengeWith a 10 per cent required ratio, a 5 per cent currency drain and $5,000 of initial deposits, what is the maximum total deposits?
ChallengeWith a 10 per cent required ratio and 5 per cent excess reserves, what is the maximum total deposits from $1,500 of initial deposits?
ChallengeWhich institutions issue banknotes in Hong Kong?
Error redoA student says a currency drain is just the public withdrawing cash and cannot affect the money supply. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Savings deposits and time deposits with licensed banks	M2 equals M1 plus savings and time deposits held with licensed banks, one layer broader than M1.
2	It lowers the deposit multiplier and weakens the power to create credit	Cash kept by the public never returns to the banks for relending, so each round of lending is smaller.
3	Reserves that a bank chooses to hold above the required minimum	Excess reserves are the extra buffer kept for withdrawals or for waiting for better lending opportunities, over and above the legal minimum.
4	About 3.33, which is 1 divided by the sum of 0.20 and 0.10	The currency drain is an extra leakage, so it is added to the reserve ratio before taking the reciprocal.
5	Deposits with restricted licence banks and deposit taking companies	M3 adds one more layer of smaller deposit institutions and is the broadest money measure.
6	Both lower the multiplier, so the money supply falls	A currency drain and excess reserves both cut the share of funds available for lending, so the multiple expansion becomes smaller.
7	About $33,333, which is 5,000 divided by 0.15	The effective leakage is 0.10 plus 0.05, so divide the initial deposit by 0.15.
8	$10,000, which is 1,500 divided by 0.15	Excess reserves are also a leakage, so the effective ratio is 15 per cent and the multiplier is 6.67.
9	Three note issuing banks authorised by the HKMA: Bank of China (Hong Kong), HSBC and Standard Chartered	Note issuing banks must settle in US dollars under the linked exchange rate, so note issuance cannot expand the monetary base at will.
10	Cash outside the banking system stops supporting deposit creation, so the multiplier falls and the money supply contracts	The money supply counts deposits and circulating cash, and cash outside the system can no longer be lent out.

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.

The intermediate step adds the leakages: a currency drain and excess reserves both push the actual multiplier below one over the required ratio, while M2 and M3 add savings, time and deposit-taking company deposits on top of M1.Tutor Registration →

Questions and answers are written originally by the TutorZone team and are not taken from any school, publisher or examination authority paper. Every value is checked by computer.