Cambridge A Level Economics: Current account and policies to correct imbalances (9708) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover sections 6.3 and 6.5 (outcomes 6.3.1 to 6.3.4 and 6.5.1 to 6.5.2) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is AS Level content, assumed knowledge for A Level Papers 3 and 4. All countries and figures are invented, and money is in billions of currency units (bn cu) unless stated. Read the study guide and the revision notes first. Course pages: hub and checklist. To find weak spots, use the free 10-minute diagnostics.

Questions

1. State which component of the current account each item belongs to, and whether it is a credit or a debit for Country S. (i) Country S sells software licences to a foreign firm. (ii) Dividends are paid by a Country S firm to overseas shareholders. (iii) Workers in Country S send money to families abroad. (iv) Country S imports vehicles. [4]

2. Country S, one illustrative year. Goods: credits 88, debits 97. Services: credits 45, debits 31. Primary income: credits 12, debits 20. Secondary income: credits 14, debits 6. GDP is 250.

(a) Calculate the balance of trade in goods. [1] (b) Calculate the balance of trade in services. [1] (c) Calculate the balance of trade in goods and services. [1] (d) Calculate the current account balance and state whether it is a deficit or a surplus. [2] (e) Express the current account balance as a percentage of GDP. [2]

3. Explain two causes of a current account deficit. [4]

4. Country T has goods imports of 220 and goods exports of 200. Its income rises by 4%, and the income elasticity of demand for its imports is 1.5. Incomes in its partners rise by 2.5%, and the income elasticity of demand for its exports is 0.8.

(a) Calculate the new value of goods imports. [2] (b) Calculate the new value of goods exports. [1] (c) Calculate the new balance of trade in goods and the change from the original. [2] (d) Explain why growth at home can worsen the current account. [2]

5. Explain two consequences of a persistent current account deficit for the domestic economy and one for the external economy. [6]

6. Explain one benefit and one problem of a large persistent current account surplus. [4]

7. Explain two reasons why a government may seek stability of the current account. [4]

8. In Country U the marginal propensity to save is 0.15, the marginal propensity to be taxed is 0.20 and the marginal propensity to import is 0.15. The government cuts spending by 8 to improve the current account.

(a) Calculate the value of the multiplier. [2] (b) Calculate the fall in national income. [1] (c) Calculate the fall in imports. [1] (d) Explain two reasons why the current account may improve by less than expected. [2]

9. Explain how supply-side policy could improve a country’s current account. [5]

10. An imported good costs 60 cu a unit and 400 units are bought each year. The government imposes a tariff of 25%. The price elasticity of demand for the good is −0.4.

(a) Calculate the new price to buyers and the new quantity. [2] (b) Calculate the change in payments to foreign suppliers. [2] (c) Evaluate whether the tariff is likely to correct a current account deficit. [5]

11. Country V has a current account deficit that comes from rapid growth in consumer spending financed by cheap credit. Evaluate the use of higher interest rates to reduce the deficit. [10]

Answers

1. (i) Trade in services, a credit [1]. (ii) Primary income, a debit [1]. (iii) Secondary income, a debit [1]. (iv) Trade in goods, a debit [1]. [4] Examiner insight: Give both the component and the direction. Income from investment is primary income, but a transfer with nothing in return is secondary income.

2. (a) 88 − 97 = −9 [1]. [1] (b) 45 − 31 = +14 [1]. [1] (c) −9 + 14 = +5 [1]. [1] (d) Primary income is 12 − 20 = −8 and secondary income is 14 − 6 = +8 [1]. CAB = 5 − 8 + 8 = +5 bn cu, a surplus [1]. [2] (e) 5 ÷ 250 × 100 [1] = 2.0% of GDP [1]. [2] Examiner insight: Show each line before the total, and keep the signs. A correct method is easier to reward when the working is visible.

3. Cause one: faster growth at home than abroad raises incomes and so import spending [1], which widens the deficit if imports are income elastic [1]. Cause two: higher costs or inflation than rivals make exports dearer abroad and imports cheaper at home [1], so exports fall and imports rise [1]. Other valid causes: weak foreign demand, an overvalued currency, a fall in a main export price, low quality. [4] Examiner insight: A cause needs its effect on exports, imports or income flows. A bare list of causes usually scores less than two developed ones.

4. (a) Imports rise 1.5 × 4 = 6% [1], so 220 × 1.06 = 233.2 [1]. [2] (b) Exports rise 0.8 × 2.5 = 2%, so 200 × 1.02 = 204 [1]. [1] (c) New balance = 204 − 233.2 = −29.2 [1]. Original balance = −20, so the balance worsens by 9.2 [1]. [2] (d) Higher income raises spending on imports [1]. Because the income elasticity of imports (1.5) exceeds that of exports (0.8), imports grow faster than exports and the gap widens [1]. [2] Examiner insight: State both elasticities and compare them. A growth-and-imports answer with no comparison stops at description.

5. Domestic one: net exports are negative, so aggregate demand is lower than it would be, which can slow growth [1] and cost jobs in export and import-competing firms [1]. Domestic two: pressure on the currency may push it down, raising import prices and costs, which can push up inflation [1]. Support: the effect is larger if the deficit is large or lasts [1]. External: partners with surpluses gain demand for their exports [1], and the deficit must be financed by borrowing, asset sales or reserves, so foreign ownership or debt rises [1]. [6] Examiner insight: Say whether each consequence is for the domestic or external economy. Judge size and duration, because a small, temporary deficit may not matter.

6. Benefit: net exports add to aggregate demand, so output and employment may rise [1], and the country can build reserves or lend abroad [1]. Problem: the surplus may reflect weak domestic demand and low consumption [1], or may provoke trading partners with matching deficits to use protection [1]. [4] Examiner insight: Show you know a surplus is not automatically good. Two developed points beat four one-word items.

7. Reason one: a large persistent deficit needs finance from abroad [1], and lenders may withdraw or ask for higher returns, which creates instability [1]. Reason two: a falling currency raises import prices and can feed inflation [1]. Stable external trade also supports growth and employment [1]. A large surplus is a further reason, since it can invite retaliation. [4] Examiner insight: The objective is stability, not a balance of exactly zero. Saying so avoids a common slip.

8. (a) Withdrawals = 0.15 + 0.20 + 0.15 = 0.50 [1]. Multiplier = 1 ÷ 0.50 = 2 [1]. [2] (b) Income falls 8 × 2 = 16 [1]. [1] (c) Imports fall 0.15 × 16 = 2.4 [1]. [1] (d) Exports may fall if trading partners slow at the same time [1]. Households may cut spending on home goods more than on imports, so the true mpm is lower than assumed and imports fall by less [1]. [2] Examiner insight: Part (d) asks for reasons, so state a reason and a link to the account. Naming a drawback with no effect on the account does not answer the question.

9. Policies such as education, training, infrastructure and research raise productivity and quality [1]. Higher productivity lowers unit costs, so export prices can fall [1]. Better quality improves non-price competitiveness [1]. Exports rise and home goods replace some imports [1]. The effect is lasting and does not cut output, but takes years [1]. [5] Examiner insight: Build the chain from policy to productivity to costs to trade. A claim that exports “go up” with no mechanism is thin.

10. (a) New price = 60 × 1.25 = 75 cu [1]. Quantity falls 0.4 × 25 = 10% to 360 [1]. [2] (b) Before: 400 × 60 = 24,000. After: 360 × 60 = 21,600 [1]. Payments to foreign suppliers fall by 2,400 cu [1]. The government collects 360 × 15 = 5,400 cu, which is not part of that payment. [2] (c) The tariff reduces the outflow, but only by 10% because demand is inelastic [1]. Buyers’ outlay rises from 24,000 to 360 × 75 = 27,000 [1]. Trading partners may retaliate and cut exports [1]. Dearer imports can raise costs for firms using them [1]. It works better if demand is elastic or the deficit is caused by this good, and a judgement depends on the cause [1]. [5] Examiner insight: Separate payments to foreign suppliers from buyers’ outlay. A judgement that names the condition for success is worth more than a list.

11. Higher rates raise borrowing costs and cut credit-fuelled spending [1], so consumption falls [1] and income falls [1]. Lower income reduces imports by the mpm times the fall in income [1], so the deficit narrows [1]. The cause is rapid consumer growth, so the policy targets the cause directly [1]. Against this, higher rates may attract foreign funds and raise the currency, making exports dearer [1]. Investment, growth and jobs may suffer, and the effect depends on how sensitive spending is to rates [1]. If the mpm is low, imports fall little [1]. Judgement: the policy suits a credit-driven import boom, but works best alongside supply-side policy if the fall in competitiveness is the lasting cause, and the balance depends on the cause, speed and the size of the exchange-rate effect [1]. [10] Examiner insight: Tie the answer to the cause given in the stem. A reasoned judgement that depends on a condition scores better than a summary of points.

Where marks are usually lost

• Giving a deficit without a minus sign, or a CAB without a unit.
• Ignoring primary and secondary income, or confusing the two.
• Using the balance of goods and services as the CAB.
• Using the wrong base for a percentage of GDP.
• Quoting an elasticity without applying it to a base value.
• Treating tariff revenue as a payment abroad, or outlay as the same thing.
• Stating a policy without the link to imports, exports or income.
• Ending an evaluation with a summary and no judgement or condition.

Next steps

• Review the revision notes and the study guide.
• Return to the course hub and the printable checklist.
• Try the international economic issues practice set.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, sections 6.3 and 6.5 (Cambridge University Press & Assessment).