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AQA AS-Level Economics 7136
Economic Methodology and the Economic Problem
Price Determination in a Competitive Market
Topic overviewDemand, the demand curve, income and wealthSubstitutes, complements and consumer preferencesPrice elasticity of demand and total revenueThe determinants of price elasticity of demandIncome and cross elasticity of demandThe determinants of supplyPrice elasticity of supplyEquilibrium, disequilibrium and how a market clearsShifts in demand and supply, and the price mechanismThe interrelationship between markets
Production, Costs and Revenue
Perfect Competition, Imperfectly Competitive Markets and Monopoly
The Market Mechanism, Market Failure and Government Intervention
Topic overviewHow markets and prices allocate resourcesThe meaning of market failurePublic goods, private goods and quasi-public goodsPositive and negative externalitiesMerit and demerit goodsMarket imperfectionsAn inequitable distribution of income and wealthIndirect taxes and subsidiesPrice controls, state provision and regulationEvaluating intervention and the mixed economyGovernment failure
The Measurement of Macroeconomic Performance
How the Macroeconomy Works
Topic overviewThe circular flow of incomeThe aggregate demand and aggregate supply curvesWhat shifts short-run and long-run aggregate supplyMacroeconomic equilibrium and economic shocksConsumption and investmentGovernment spending and net exportsThe accelerator, saving and investmentAggregate demand and the level of economic activityThe determinants of aggregate supply
Economic Performance
Topic overviewShort-run and long-run economic growthThe economic cycle and output gapsDemand-side and supply-side shocksMeasuring unemployment and the types of unemploymentThe determinants of employment and policies to reduce unemploymentInflation and deflationThe quantity theory of moneyConsequences of inflation and deflationThe balance of payments on current accountOutput gaps and the growth-inflation conflictReconciling policy objectives in the AD/AS model
Financial Markets and Monetary Policy
Fiscal Policy and Supply-Side Policies
Financial Markets and Monetary Policy
- 5 subtopics
- 39 things to know
- Papers 2 and 3
What Financial Markets and Monetary Policy covers
Financial markets and monetary policy is examined on Papers 2 and 3. It covers money and the markets that move it, what banks do and the risks they run, then the Bank of England's policy and how a change in bank rate reaches the real economy.
Where it is assessed
Papers 2 and 3
The national and international economy, then the synoptic paper.
Check the AQA specification ↗The 5 subtopics
Each one has its own page. AQA AS Economics students sit this topic in the first year.
- The instruments and institutions of monetary policyInterest rates, the money supply, credit and the exchange rate as the instruments of policy.Open →
- How bank rate changes affect the economyWhat a rise or fall in bank rate does to borrowing, saving, consumption, investment and aggregate demand.Open →
- What the MPC considers, and the exchange rate channelThe data behind an interest rate decision, and how the exchange rate carries policy into the economy.Open →
- The bank rate and the MPC's decisionsThe inflation target, who sets bank rate, and the conditions for raising or lowering it.Open →
- Exchange rate movements and the macroeconomyWhat depreciation and appreciation do to net exports, inflation, the current account and employment.Open →
What you need to know
Answer each one before you reveal it.
Your recallNot started
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What is bank rate, and what does a rise in it do to the cost of loans?
Evaluation
What does a rise in bank rate do to consumption, investment and aggregate demand?
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Why do growth and expected inflation matter to the MPC's rate decision?
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How do confidence and wage growth influence the MPC's decision?
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How does an appreciation of the exchange rate affect the domestic price of imports?
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How does the asset price channel of monetary policy work?
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What is a bond's yield and maturity, and what is needed to calculate the yield?
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Why do bond prices and market interest rates move in opposite directions?
Process
How do financial markets channel funds and provide liquidity?
Process
What is price discovery, how is risk managed, and what is debt finance?
Process
How do debt and equity differ in their returns and in a liquidation?
Key term
How can a firm raise finance by issuing shares?
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What is the foreign exchange market?
Key term
What do commercial and investment banks do, and must a bank be one or the other?
Key term
Which items are assets on a commercial bank's balance sheet?
Key term
Which items are liabilities on a bank's balance sheet, and what is the balance sheet identity?
Process
What is the first step in the credit creation process?
Key term
What happens to the portion of a deposit that a bank does not hold as reserves?
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How does monetary policy work on rates and the money supply, and what reserves does a central bank hold?
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What are open market operations, reserve requirements and the expectations channel?
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What is bank rate, who sets it, and when would they raise it?
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Why do growth, expectations and unemployment inform the MPC's decision?
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Why do consumer spending, wage growth and business investment matter to the MPC?
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What does an appreciation do to export prices, and a depreciation to aggregate demand?
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How do depreciation and appreciation affect the current account and inflation?
Evaluation
How does a change in bank rate work through the cost of borrowing and the return on saving?
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What happens to the exchange rate when demand for sterling increases due to higher interest rates?
Process
How do rising asset prices affect household wealth?
Key term
What is the effect on consumption when household wealth increases due to rising asset prices?
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What is the ultimate aim of QE when bank rate is at or near zero?
Evaluation
What is a liquidity ratio, and how does it affect financial stability?
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What is a capital ratio, and what is the trade-off in holding more liquid assets?
Key term
What is the difference between a bank being illiquid and being insolvent?
Key term
Through what channels are financial institutions interconnected, allowing contagion to spread?
Key term
Can a bank be illiquid but still solvent? Explain.
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State the formula for calculating the yield on a government bond.
Key term
What characteristics must money have, and what functions does it perform?
Key term
Who regulates the UK financial system, and what risks do banks run?
Take Financial Markets and Monetary Policy further
The same content, four other ways.
Commonly confused
Pairs that lose marks when they are blurred together.
Money market vs Capital market
Money market: trading in short-term funds and liquid assets. Capital market: trading in longer-term finance and securities.
Commercial bank vs Central bank
Commercial bank: institution accepting deposits and providing private credit. Central bank: public institution managing monetary conditions and financial stability.
Liquidity vs Solvency
Liquidity: ease of converting an asset into spendable funds. Solvency: ability to meet total financial obligations.
Questions from this topic
Each one with the model answer underneath.
- 1
What is the manipulation of interest rates as a component of monetary policy?
Model answer
The central bank adjusts interest rates to influence borrowing, spending, and saving behaviour in the economy.
- 2
How does control of the money supply form part of monetary policy?
Model answer
The central bank takes action to regulate the total quantity of money circulating in the economy.
- 3
What does control of credit involve as a monetary policy tool?
Model answer
The central bank influences the availability and terms of credit extended by financial institutions to borrowers.
- 4
How can monetary policy influence the exchange rate?
Model answer
Central bank actions on interest rates and money supply affect capital flows and demand for the currency, thereby influencing its exchange rate.
- 5
Which institution is responsible for implementing monetary policy in the UK?
Model answer
The Bank of England.
- 6
Who sets the objectives of monetary policy in the UK—the Bank of England or the government?
Model answer
The government sets the objectives of monetary policy, not the Bank of England.
What is inside Levo
Six ways to work the same material.
Financial Markets and Monetary Policy revision questions
- Is Financial Markets and Monetary Policy examined at AS in AQA Economics?
- Yes. It sits in Papers 2 and 3, which you take in the first year, so it is on the AS paper as well as counting towards the full A level.
- What does Financial Markets and Monetary Policy cover in AQA AS-Level Economics?
- 5 subtopics: the instruments and institutions of monetary policy, how bank rate changes affect the economy, what the mpc considers, and the exchange rate channel, the bank rate and the mpc's decisions and exchange rate movements and the macroeconomy. Each one has its own page with questions and model answers.
- How is Financial Markets and Monetary Policy organised?
- By the AQA 7136 specification, subtopic by subtopic, so it matches the order you are taught it in.
Every question in Financial Markets and Monetary Policy, on a schedule.
Attempt a question from memory, write the correct version, then attempt it again. Levo records the jump between your first attempt and your last, and brings each question back on the day you are due to forget it.
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