Cambridge A Level Economics: Supply-side, exchange rate and trade policies (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 part of section 10.3 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028: supply-side, exchange rate and international trade policy (10.3.1), problems and conflicts (10.3.2) and government failure (10.3.3). Topic 10 is A Level content only. All countries and figures are invented.

Teaching is in the study guide and the revision notes. See also the Cambridge A Level Economics hub, the printable checklist and the free diagnostics.

Questions

1. Explain the difference between market-based and interventionist supply-side policy, giving one example of each. [4]

2. In Country K, wages per worker rise 5% while output per worker rises 8%. (a) Calculate the percentage change in unit labour cost. [2] (b) State one effect of this change on the country’s competitiveness. [1]

3. Country L cuts its marginal income tax rate from 45% to 35%. A worker is offered 60 cu for an extra hour. Total hours supplied are 1,200 million, and the elasticity of labour supply with respect to the net wage is 0.25. Calculate the new level of total hours supplied. [4]

4. Country M’s exchange rate falls from 1.25 to 1.15 units of foreign currency per unit of home currency. Exports are 600 and imports 650 (home currency, a deficit of 50). Export prices in home currency are unchanged and foreign import prices are unchanged. Elasticity of demand for exports is 0.9 and for imports 0.6.

(a) Calculate the percentage fall in the exchange rate. [1] (b) Calculate the new trade balance. [4]

5. Country N holds its currency at 4.00 units of foreign currency. At that rate the supply of its currency exceeds demand by 35 million a month. Its reserves are 560 million units of foreign currency. Calculate how many months the reserves can support the rate. [3]

6. A government wants lower inflation. Imports are 20% of its price index. Evaluate whether it should let its currency appreciate by 5%. [6]

7. Country P imports 500 (before tariff), with import demand elasticity 0.8. It imposes a 20% tariff. Its partner retaliates with a 12% tariff on Country P’s exports of 300, with export demand elasticity 1.1. Calculate the net effect on the balance of payments, ignoring tariff revenue, and the tariff revenue. [5]

8. Country H has high unemployment and a large current account deficit. It lets its currency depreciate by 10%. Imports are 25% of the price index and import prices in home currency rise by 11.1%. Explain two conflicts that may follow. [6]

9. Define government failure in macroeconomic policy and explain two causes of it. [5]

10. Country Q’s output gap (percentage of potential output) would be −2, −2, −1, 0 and +1 in periods 1 to 5. A stimulus adds 2 points to the gap from period 4. (a) State the gap in periods 4 and 5 with the stimulus. [1] (b) If each point of positive gap adds 0.5 points to inflation, calculate the extra inflation caused by the stimulus in period 5. [1] (c) Explain two reasons why the stimulus may have been badly timed. [2]

11. A country has a persistent current account deficit and high unemployment. Evaluate the effectiveness of supply-side policy compared with exchange rate policy and trade protection in tackling these problems. [12]

Answers

1. Market-based policy strengthens incentives and frees markets [1]; for example a lower marginal tax rate raises the return to work and so labour supply [1]. Interventionist policy uses the state to improve factors of production directly [1]; for example government-funded training raises productivity [1]. [4] Examiner insight: Answers tend to gain credit when the contrast is stated (incentives and freer markets against state provision), not just two examples.

2. (a) New unit labour cost relative to old = 1.05 ÷ 1.08 = 0.9722 [1]. A fall of 2.8% [1]. (b) Lower unit costs let firms cut prices, so exports are more price competitive [1]. [3] Examiner insight: Show the ratio, not just the answer; subtracting 8 from 5 gives a different, wrong number.

3. Net pay before = 60 × 0.55 = 33 cu; after = 60 × 0.65 = 39 cu [1]. Rise = 6 ÷ 33 = 18.2% [1]. Hours rise 0.25 × 18.2% = 4.5% [1]. New hours = 1,200 × 1.0455 = 1,254.5 million [1]. [4] Examiner insight: Take the percentage change in the net wage, not in the tax rate; this is the commonest slip.

4. (a) (1.15 − 1.25) ÷ 1.25 = −8% [1]. (b) Import prices in home currency rise by 1.25 ÷ 1.15 − 1 = 8.7% [1]. Exports = 600 × (1 + 0.9 × 0.08) = 643.2 [1]. Imports = 650 × 1.0870 × (1 − 0.6 × 0.0870) = 669.7 [1]. Balance = 643.2 − 669.7 = −26.5, an improvement of 23.5 from −50 [1]. [5] Examiner insight: Use the rise in home import prices (8.7%), not the 8% fall in the rate; the two are not equal.

5. Central bank buys 35 million of its own currency each month [1]; cost = 35 × 4.00 = 140 million units of foreign currency a month [1]. Months = 560 ÷ 140 = 4 months [1]. [3] Examiner insight: State the direction of the intervention (buying the home currency, paid for from reserves) and give units.

6. Import prices fall by 1 − 1 ÷ 1.05 = 4.8% [1]. With imports at 20%, the direct effect is about 0.95 points off the price level [1]. Cheaper imported inputs lower firms’ costs [1]. Against this, exports become dearer, net exports and AD fall, and unemployment and the current account worsen [1]. The result depends on elasticities, the share of imports and how long the effect takes [1]. A judgement, for example that appreciation is a modest, slow tool for a small fall in inflation that carries a cost in jobs, with support [1]. [6] Examiner insight: Answers gain credit when evaluation names the factor that decides the outcome, rather than writing “it depends”.

7. Import volume falls 0.8 × 20% = 16% [1]. Payments to foreign sellers = 500 × 0.84 = 420, a fall of 80 [1]. Tariff revenue = 20% × 420 = 84 [1]. Exports fall 1.1 × 12% = 13.2% to 260.4, a loss of 39.6 [1]. Net gain to the balance = 80 − 39.6 = 40.4 [1]. [5] Examiner insight: Keep tariff revenue separate: it goes to the government, not to foreign sellers.

8. Conflict 1: higher import prices raise the price level by 25% × 11.1% = 2.8 points [1], so the policy that helps unemployment and the deficit worsens inflation [1], and lowers real incomes [1]. Conflict 2: higher import prices feed wage claims and costs [1], shifting short-run supply left, which cuts output and jobs [1] and erodes the competitiveness gain [1]. [6] Examiner insight: A conflict is a trade-off between two named objectives; explain how one gains while the other loses.

9. Government failure occurs when intervention leaves the economy worse off, or creates new problems that outweigh its benefits [1]. Cause 1: time lags, so the policy takes effect at the wrong stage of the cycle [1] and adds to the problem [1]. Cause 2: short-term political aims, for example boosting demand before an election [1], which risks inflation or debt later [1]. [5] Examiner insight: A cause needs a consequence; naming “poor information” alone earns less than saying what goes wrong because of it.

10. (a) Period 4: 0 + 2 = 2; period 5: 1 + 2 = 3 [1]. (b) Extra inflation = 2 × 0.5 = 1.0 percentage point [1]. (c) The stimulus was decided when the gap was negative, but it acted after the economy had closed the gap itself [1]. Forecasts and lags (recognition, decision, impact) make it hard to time policy [1]. [4] Examiner insight: Refer to the table figures when explaining the timing; a general statement about lags is weaker.

11. Supply-side: raises productivity and competitiveness, so exports rise and imports fall over time, and structural unemployment falls [1]. Market-based measures strengthen incentives but may widen inequality; interventionist measures lift skills but cost money and take years [1]. Little help if the unemployment is demand-deficient [1], and the effects take years, so the deficit persists meanwhile [1]. Exchange rate policy: a lower rate makes exports cheaper and imports dearer, raising AD and cutting unemployment [1]. It improves the current account only if demand elasticities are high enough, and may worsen it first [1]. It raises import prices and inflation [1]. Trade protection: reduces imports and protects jobs in the shielded sector [1], but invites retaliation, raises prices and cuts efficiency [1]. Conflicts and government failure: each policy conflicts with another objective, and lags and lobbying can cause failure [1]. Judgement: supply-side policy is the most durable but slowest, exchange rate policy is faster but risks inflation, and protection is weakest as retaliation can cancel gains; the best answer recommends a combination, supported by the case [2]. [12] Examiner insight: Strong answers keep both problems in view, state the objective each policy helps, and reach a supported judgement.

Where marks are usually lost

• Calculating the change in the net wage from the tax rate instead of the net pay.
• Using the percentage fall in the exchange rate as the rise in home import prices.
• Giving the direction of a trade balance change without the elasticities.
• Mixing up who receives the tariff revenue.
• Listing policies with no link to an objective.
• Calling any policy conflict “government failure”.
• Forgetting imported inflation after depreciation.
• Giving a conclusion that repeats the question rather than weighing the policies.

Next steps

• Review the revision notes and the study guide.
• Go to the Cambridge A Level Economics hub and the printable checklist.
• Try all 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, version 2, published by Cambridge University Press & Assessment. These questions cover 10.3.1 (supply-side, exchange rate and international trade policy), 10.3.2 and 10.3.3.