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S6 Economics: Money Supply and Credit Creation (Paper 4: mistake clinic)
S6 Economics: Money Supply and Credit Creation (Paper 4: mistake clinic)
This last paper revisits three frequent errors: treating the ratio as the multiplier, ignoring the currency drain and mixing up required with excess reserves.
Direct answers Spend three seconds checking those three points after every question, which works better than rereading the notes.
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 the definition of M1?
- FoundationWhat is the formula for the deposit multiplier?
- FoundationWith a 50 per cent required ratio, what is the maximum total deposits from $600 of initial deposits?
- IntermediateAt a 20 per cent required ratio with $1,500 of initial deposits, what are the maximum total deposits and the new deposits?
- IntermediateWith M = 400, V = 3 and Y = 1,200, what is the price level P?
- IntermediateWhy does a currency drain lower the deposit multiplier?
- ChallengeWith a 10 per cent required ratio, a 10 per cent currency drain and $2,000 of initial deposits, what is the maximum total deposits?
- ChallengeHow do required reserves differ from excess reserves?
- ChallengeIf M rises 10 per cent, Y rises 4 per cent and V is unchanged, roughly how much does the price level rise?
- Error redoA student answers that $1,000 at a 20 per cent reserve ratio creates only $200 of new deposits. What is the correct answer?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | Legal tender notes and coins plus demand deposits with licensed banks | The narrowest measure counts only assets that can be spent immediately. |
| 2 | One divided by the required reserve ratio | The multiplier is the reciprocal of the ratio, so a lower ratio gives a bigger multiplier. |
| 3 | $1,200 | One over 0.50 is 2, and 2 times 600 is 1,200. |
| 4 | A total of $7,500 and new deposits of $6,000 | Divide 1,500 by 0.20 to get 7,500 and subtract the original 1,500 to leave 6,000. |
| 5 | 1 | MV is 1,200 and dividing by Y of 1,200 gives a price level of 1. |
| 6 | Part of each loan is held by the public as cash and never returns to the bank for relending | With a smaller returning share each round shrinks geometrically, so the total created is smaller. |
| 7 | $10,000, which is 2,000 divided by 0.20 | The effective leakage is 0.10 plus 0.10, so the multiplier is 5. |
| 8 | Required reserves are the legal minimum while excess reserves are what the bank chooses to hold on top | Both lock up funds, but only the required part is a rule that cannot be broken. |
| 9 | About 5.8 per cent | Taking 1.10 divided by 1.04 minus 1 gives about 5.8 per cent. |
| 10 | A multiplier of 5, $5,000 of total deposits and $4,000 of new deposits | The 0.2 is the reserve fraction while the multiplier is its reciprocal of 5, and the original 1,000 is then subtracted. |
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.
Keep three columns in the error log: question, cause, corrected steps. The three commonest slips here are treating the reserve ratio as the multiplier, ignoring the currency drain, and mixing up required with excess reserves.Tutor Registration →
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