Cambridge International AS and A Level Economics: Objectives and Phillips curve (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 10.1.1 and 10.2.1 to 10.2.5 of the Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028. This is A Level content (topic 10); AS content is assumed knowledge. The countries and figures are made up. Read the study guide and the revision notes first. The course hub and checklist show the rest of the syllabus, and the floating exchange rates page helps with questions 6 and 10.

Questions

1. Distinguish between the internal value of money and the external value of money. [2]

2. Country A had goods exports of 420, goods imports of 455, net services of +30, net primary income of −12 and net secondary income of −8 (currency units). GDP was 1,250. Calculate the current account balance and express it as a percentage of GDP. [3]

3. A consumer price index in Country G rises from 108.0 to 112.32. Nominal wages rise by 6%.

(a) Calculate the inflation rate. [2] (b) Calculate real wage growth. [2]

4. In the short run, Country G’s economy offers these combinations of unemployment and inflation: unemployment 4% with inflation 6%; unemployment 6% with inflation 4%; unemployment 8% with inflation 3%.

(a) Calculate the extra inflation from cutting unemployment from 6% to 4%. [1] (b) Explain why raising unemployment from 6% to 8% lowers inflation by less. [3]

5. Country H’s nominal GDP rises from 480 to 513.6 while its price deflator rises from 100 to 104. Calculate real GDP growth to 1 decimal place. [3]

6. One unit of Country D’s currency buys 4.00 units of Country E’s currency. A basket costs 50 in D and 200 in E. A year later prices in D are 6% higher and prices in E are 2% higher. The exchange rate has not changed.

(a) Show that the basket cost the same in both countries at the start. [1] (b) Calculate how much dearer D’s basket is in E’s currency than E’s basket. [2] (c) Calculate the exchange rate that restores the original relationship, and the percentage depreciation needed. [2]

7. Country J has imports of 500 and exports of 480. Income elasticity of demand for imports is 2.2. Real income grows 4% and exports grow 3%.

(a) Calculate the new value of imports. [2] (b) Calculate the new current account balance on goods. [2] (c) Suggest one reason why the balance might improve in later years. [1]

8. In Country K, inflation = expected inflation − 0.8 × (unemployment − 4), with both rates in percent. Expected inflation is 2.5% and unemployment is 4%. The government holds unemployment at 3% for three years. Each year, expected inflation equals the previous year’s inflation.

(a) Calculate inflation in each of the three years. [3] (b) The government then lets unemployment return to 4%. Calculate inflation in year 4 and explain the result. [2] (c) State the shape of the long-run Phillips curve. [1]

9. Explain why a government cannot permanently keep unemployment below the natural rate by raising aggregate demand. [6]

10. Country L’s currency falls 8% against its trading partners. Imports have a weight of 25% in its price index.

(a) Calculate the rise in import prices in L’s currency and the direct effect on the price index. [3] (b) Give one reason the effect on the price index may be smaller and one reason it may be larger over time. [2]

11. Country M’s real GDP grows 4% and its population grows 1.5%.

(a) Calculate growth in real GDP per head to 1 decimal place. [2] (b) Explain two ways in which an objective of faster growth may conflict with other objectives. [4]

12. Evaluate whether a government can achieve both low inflation and low unemployment. [10]

Answers

1. The internal value of money is its purchasing power over goods and services at home, which falls when the price level rises [1]. The external value is what it buys abroad, shown by the exchange rate [1]. [2] Examiner insight: A definition question rewards a precise contrast. Say where each value is measured, not just that they are “different”.

2. Goods balance: 420 − 455 = −35 [1]. Current account: −35 + 30 − 12 − 8 = −25 [1]. As a share of GDP: −25 / 1,250 × 100 = −2.0% [1]. [3] Examiner insight: Include the sign. A deficit given as a positive number tells the reader you have not interpreted your own result.

3. (a) Change = 112.32 − 108.0 = 4.32 [1]. Inflation = 4.32 / 108.0 × 100 = 4.0% [1]. (b) Real growth = 1.06 / 1.04 − 1 [1] = 1.92% [1]. [4] Examiner insight: Subtracting 4 from 6 gives about 2%, which is close but not the figure asked for. Show the division when a precise answer is wanted.

4. (a) 6 − 4 = 2 percentage points more inflation [1]. (b) Raising unemployment from 6% to 8% lowers inflation by 1 point only [1]. The curve is convex, flattening as unemployment rises [1]. At high unemployment wage pressure is already weak, so extra jobless workers lower wage growth and prices very little [1]. [4] Examiner insight: Use the numbers from the table in your explanation. A general statement about “diminishing returns” without 2 and 1 does not use the data you were given.

5. Nominal growth = 513.6 / 480 − 1 = 7.0% [1]. Real growth = 1.070 / 1.04 − 1 [1] = 2.885% = 2.9% [1]. [3] Examiner insight: Follow the rounding instruction. Keep extra digits until the last step and round once at the end.

6. (a) 50 × 4.00 = 200, equal to E’s price [1]. (b) D’s basket is 50 × 1.06 = 53, which is 53 × 4.00 = 212 in E’s currency [1]. E’s basket is 200 × 1.02 = 204, so D’s is 212 / 204 − 1 = 3.9% dearer [1]. (c) Parity rate = 204 / 53 = 3.85 units of E per unit of D [1]. Depreciation = (4.00 − 3.849) / 4.00 = 3.8% [1]. [5] Examiner insight: Express both prices in the same currency before comparing. Part (c) depends on the prices you found in part (b), so state which figures you are using.

7. (a) Import growth = 2.2 × 4% = 8.8% [1]. New imports = 500 × 1.088 = 544 [1]. (b) New exports = 480 × 1.03 = 494.4 [1]. Balance = 494.4 − 544 = −49.6, compared with −20 at the start [1]. (c) Investment during the growth period raises export capacity or productivity, so export volumes rise [1]. [5] Examiner insight: Say that the deficit widened, not just what the number is. Linking growth to the balance in a sentence earns credit that bare calculations do not.

8. (a) Year 1: 2.5 − 0.8 × (3 − 4) = 3.3% [1]. Year 2: expected inflation 3.3, so 3.3 + 0.8 = 4.1% [1]. Year 3: 4.1 + 0.8 = 4.9% [1]. (b) Year 4: unemployment is at the natural rate, so inflation = expected inflation = 4.9% [1]. Unemployment returns to the natural rate but inflation stays high until expectations fall [1]. (c) Vertical, at the natural rate of unemployment [1]. [6] Examiner insight: Use the model’s own rule each year and show the expectation you used. In part (b), say that the short-run gain has gone while the higher inflation remains.

9. Higher aggregate demand raises output, and firms hire more workers [1], so unemployment falls below the natural rate [1]. Labour markets tighten, wages and prices rise [1]. Workers see that real wages have fallen and revise their expectations of inflation upwards [1]. The short-run Phillips curve shifts up, and the real wage is restored so firms stop expanding [1]. Unemployment returns to the natural rate with higher inflation, so the long-run Phillips curve is vertical [1]. [6] Examiner insight: A chain of linked steps scores better than a list of terms. Show what workers expect and why real wages matter.

10. (a) Import price rise = 1 / 0.92 − 1 = 8.7% [1]. Direct effect = 0.25 × 8.7 [1] = 2.2 percentage points on the price index [1]. (b) Smaller: importers may absorb part of the rise in their profit margins, or domestic competition limits price rises [1]. Larger: dearer imported inputs raise costs for firms, and workers may demand higher wages (second-round effects) [1]. [5] Examiner insight: A currency fall of 8% does not mean import prices rise by 8%. The reciprocal calculation matters, and the evaluation points need a reason, not just “it depends”.

11. (a) 1.04 / 1.015 − 1 [1] = 2.5% [1]. (b) Growth vs sustainability: faster growth may use up resources or raise pollution [1], which lowers the living standards future generations can reach [1]. Growth vs redistribution: gains from growth may go mostly to higher incomes, widening inequality, or policies to share income may reduce incentives and slow growth [1], so the objectives must be traded off by value judgement [1]. [6] Examiner insight: For “two ways” answers, label each conflict and develop it separately. A single sentence naming two objectives is a statement, not an explanation.

12. Traditional Phillips curve analysis suggests a trade-off, so lower unemployment appears to cost higher inflation [1] because a tight labour market raises wages and prices [1]. In the short run, for given expected inflation, this trade-off exists on the short-run curve [1]. In the long run it disappears: expectations adjust and the long-run curve is vertical at the natural rate [1], so demand management alone cannot hold unemployment below it [1]. Both goals can be met together only if the natural rate falls, through supply-side policies such as training or better labour-market information [1], or through supply-led growth that raises potential output with low price pressure [1]. Credible inflation targets lower expected inflation, which makes low inflation cheaper to keep [1]. Supply shocks and wage pressure can shift the curve and break the pattern [1]. Judgement: low inflation with low unemployment is possible in the long run, when supply-side improvement and credible policy combine, but not by raising aggregate demand alone, and the timescale is long [1]. [10] Examiner insight: Evaluation means a reasoned conclusion that weighs time, causes and policy credibility. Keep the final judgement tied to the argument you built.

Where marks are usually lost

• Dropping the minus sign on a deficit, or omitting units.
• Subtracting percentages where a ratio is needed (real wage growth, real GDP growth).
• Rounding early and then giving a final figure that differs in the last digit.
• Treating a fall in the exchange rate as a 1-for-1 rise in import prices.
• Moving the Phillips curve without saying what expectations or costs changed.
• Drawing a sloping long-run Phillips curve or placing it at zero unemployment.
• Describing a conflict between objectives without showing the mechanism.
• Finishing an essay with a summary and no judgement.

Next steps

• Review the revision notes and the study guide.
• See the course hub and the checklist.
• Try all the free diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028, Cambridge University Press & Assessment, sections 10.1.1 and 10.2.1 to 10.2.5.