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    Hi there,
    Im struggling with this question, I would be grateful for any help given.
    Specifically though:
    -Model Answer
    -Points to write about

    Context 2 – 5 Extract F (line 7–8) states that ‘This is a move away from the more familiar role of interest rates, which has been to control inflation.’ Explain how monetary policy can be used to control inflation. [10 marks]


    As for the question, I am unable to give a full example because I am unsure of the context. However, If it were me answering the question I would start with a breif explanation of whatever "this is a move away from" (including graph of relationship) then move to how monetary policy is used to control inflation. I would definitely use graphs after each explanation and use examples 'irl'.

    Interest rates are pretty much the answer I would give. I would write about how the CB manipulates interest rates and how that effects inter-bank lending. Then I would show how the rates are passed on to customers (and the time it takes) as well as the effects that has on overall inflation. I would include a graph of past interest rates and couple that was inflation at the time to prove this works. I might also mention that the low interest rates we had, which were extreamly low were to kick-start inflation and now that rate is rising the CBs are increasing the interest rate to kerb inflation. Inflation targeting could also be used. Overall this would take me roughly 600-800 words including graphs.

    Central bank uses monetary policy to control inflation and stabilize the economy by manipulating the money supply which is correlated with the level of interest rates.

    If the inflation is high, then it will reduce the demand for money by raising interest rates (in order to move people from money to bond market) and vice versa. This represents a movement along LM curve.
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Updated: February 19, 2018


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