In July 2016, the Sveriges Riksbank, Sweden’s central bank, reduced the rate of interest to 0.25%. The Swedish economy was facing deflation, with the weighted price index down by 0.2% compared with the previous year. The lower rate of interest decreased the value of the krona, Sweden’s currency, and was predicted to end deflation.
(a)[2]
Define what is meant by a ‘weighted price index’.
(b)[4]
Explain two ways in which a central bank is different from a commercial bank.
(c)[6]
Analyse the ways in which a fall in the value of a currency may increase a current account surplus on the balance of payments.
(d)[8]
Discuss whether cutting the rate of interest would bring deflation to an end.
Worked solution & mark scheme
This 20-mark question has a full step-by-step worked solution and mark scheme. One marking point: “An indicator of changes in the price level” …