S6 Economics: Money Supply And Credit Creation (Paper 3: Challenge)

S6 Economics: Money Supply and Credit Creation (Paper 3: challenge)

2026-11-13

S6 Economics: Money Supply and Credit Creation (Paper 3: challenge)

This third paper works on policy and growth: the monetary base, open market operations, quantitative easing and the growth rate version of MV = PY.

Direct answers　Use ratios for all growth questions and round to one decimal place, and in multiplier questions write 1 over r before substituting.

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 does the monetary base consist of?
FoundationIn MV = PY, if V and Y are unchanged and M rises 10 per cent, what happens to P?
FoundationWhat does a central bank purchase of bonds in the open market do to the monetary base?
IntermediateIf M rises 8 per cent, Y rises 3 per cent and V is unchanged, roughly how much does the price level rise?
IntermediateAt a required ratio of 8 per cent, what is the deposit multiplier and the maximum total deposits from $800 of initial deposits?
IntermediateIf nominal GDP rises 8 per cent and prices rise 5 per cent, roughly how much does real GDP rise?
ChallengeIf the required ratio falls from 10 to 8 per cent, what happens to the maximum total deposits from $1,000 of initial deposits?
ChallengeWhat does quantitative easing mainly involve?
ChallengeIf M rises 6 per cent, Y rises 2 per cent and V is unchanged, roughly how much does the price level rise?
Error redoA student says that if M and Y both rise 10 per cent there will be 10 per cent inflation. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Currency in circulation plus reserves held by the banking system	The base is the central bank liability it can control directly and is the root of multiple deposit creation.
2	It rises by about 10 per cent	With velocity and real output fixed, the whole of the money growth shows up in prices.
3	It increases the base because the central bank pays with newly created reserves	Buying bonds injects reserves into the banking system, which supports multiple lending.
4	About 4.9 per cent	In growth form take 1.08 divided by 1.03 minus 1, not simply 8 minus 3 percentage points.
5	A multiplier of 12.5 and maximum total deposits of $10,000	One divided by 0.08 is 12.5, and multiplying by 800 gives 10,000.
6	About 2.9 per cent	Real growth is roughly 1.08 divided by 1.05 minus 1, so the price rise is stripped out of the nominal figure.
7	It rises from $10,000 to $12,500	The multiplier rises from 10 to 12.5 so the same initial deposit supports more deposits, which is how expansionary policy works.
8	A central bank buying large amounts of assets to inject reserves and push down long term interest rates	When the policy rate is near zero the central bank turns to asset purchases to enlarge the base and bypass weak lending appetite.
9	About 3.9 per cent	Taking 1.06 divided by 1.02 minus 1 gives about 3.9 per cent, using a ratio rather than a subtraction.
10	The money growth is absorbed by real output growth, so the price level is broadly unchanged	Inflation depends on the gap between money growth and real growth, and a matching rise leaves inflation near zero.

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 challenge paper works on growth rates and policy: in growth terms MV = PY implies the inflation rate is roughly money growth minus real output growth, and central bank asset purchases enlarge the base that supports multiple deposit creation.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.