Cambridge A Level Economics: Monetary policy and supply-side policy (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 5.3 and 5.4 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. They are AS Level content, assumed knowledge for A Level Papers 3 and 4. All countries and figures are invented, and money is in currency units (cu). Read the study guide and the revision notes first. The course hub and checklist show the rest of the syllabus, and the free 10-minute diagnostics help you choose what to revise next.

Questions

1. Define monetary policy. [2]

2. For each action, state whether it is a monetary policy tool. If it is, name the type of tool and say whether it is expansionary or contractionary.

(a) The central bank raises its policy interest rate. [1] (b) The government lowers the maximum loan-to-value ratio for mortgages. [1] (c) The central bank buys government bonds from banks, increasing the money banks can lend. [1] (d) The government cuts the basic rate of income tax. [1]

3. A savings account pays a nominal interest rate of 3.8%.

(a) Calculate the approximate real interest rate when inflation is 1.6%. [1] (b) Calculate the approximate real interest rate when inflation rises to 3.1%. [1] (c) Explain how the change in (b) affects the incentive to save. [2]

4. A household has a variable-rate mortgage of 180,000 cu. The rate rises from 4.2% to 5.7%.

(a) Calculate the change in annual interest. [2] (b) Calculate the change per month. [1] (c) Explain how households facing this change could affect aggregate demand. [3]

5. A house costs 320,000 cu. The maximum loan-to-value ratio falls from 90% to 75%.

(a) Calculate the maximum loan and the minimum deposit before and after, and the number of times larger the deposit becomes. [3] (b) Explain how this credit regulation could affect real output. [3]

6. In an economy the demand for money is L = 600 - 50r, where L is in cu bn and r is the interest rate in %. The central bank cuts the money supply from 450 to 400 cu bn.

(a) Calculate the equilibrium interest rate before and after. [3] (b) Explain the effect on investment and aggregate demand. [3]

7. Explain whether expansionary or contractionary monetary policy suits each situation.

(a) Inflation is well above target and output is above its sustainable level. [2] (b) Unemployment is rising and growth is weak with low inflation. [2]

8. In Country P, aggregate demand is Y = 1,500 - 5P and short-run aggregate supply is Y = 600 + 5P, where Y is real output in cu bn and P is the price index.

(a) Calculate the equilibrium price level and real output. [2] (b) Expansionary monetary policy raises aggregate demand by 100 at every price. Calculate the new equilibrium. [2] (c) Work out how much, in percent, each of the price level and real output has risen. [2] (d) Explain why the price level rises as well as output. [2]

9. (a) Define supply-side policy. [2] (b) Explain how a government-funded rail link could shift the LRAS curve to the right. [3]

10. Country T has 12 million workers producing 360 bn cu of output.

(a) Calculate output per worker. [1] (b) A training programme raises the output per worker of 3 million of them by 12%. Calculate the new total output. [2] (c) Calculate the percentage increase in output. [1] (d) The programme costs 1,500 cu per trainee. Compare the cost with the annual gain in output. [2]

11. In Country U inflation is 6%. Most of the rise comes from higher costs of imported energy. Unemployment is also rising. Evaluate whether raising interest rates is the best response. [8]

Answers

1. Changes to interest rates, the money supply or credit regulations [1] made by the government or central bank to steer aggregate demand and meet macroeconomic objectives [1]. [2] Examiner insight: A definition that names only one tool, such as interest rates, is incomplete; list all three and say what the policy is for.

2. (a) Interest rate tool; contractionary [1]. (b) Credit regulation; contractionary [1]. (c) Money supply tool; expansionary [1]. (d) Not monetary policy; it is a tax change (fiscal policy) [1]. [4] Examiner insight: Part (d) tests whether you can separate policy types. Naming the policy it belongs to shows that you have understood the distinction.

3. (a) 3.8 - 1.6 = 2.2% [1]. (b) 3.8 - 3.1 = 0.7% [1]. (c) The reward for saving, after allowing for rising prices, is lower [1], so saving is less attractive and households are likely to spend more or save less [1]. [4] Examiner insight: Use the real rate in your explanation. Saying that the nominal rate has not changed misses the point of the question.

4. (a) Before: 180,000 x 0.042 = 7,560 [1]. After: 180,000 x 0.057 = 10,260, a rise of 2,700 cu a year [1]. (b) 2,700 / 12 = 225 cu a month [1]. (c) Disposable income falls by 225 cu a month [1], so consumption falls [1], and consumption is a component of AD, so AD shifts left [1]. [6] Examiner insight: Take the link all the way to AD. Stopping at “households have less to spend” leaves the chain unfinished.

5. (a) Loans: 320,000 x 0.90 = 288,000 cu before and 320,000 x 0.75 = 240,000 cu after [1]. Deposits: 32,000 cu before and 80,000 cu after [1]. The deposit is 80,000 / 32,000 = 2.5 times larger [1]. (b) Fewer buyers can raise the larger deposit [1], so borrowing and spending on housing and related goods fall, AD shifts left [1], and real output is lower than it would otherwise be [1]. [6] Examiner insight: Show the working for loan and deposit separately. Both figures are needed before the comparison has meaning.

6. (a) At 450: 600 - 50r = 450, so r = 3% [1]. At 400: 600 - 50r = 400, so r = 4% [1]. The rate rises by 1 percentage point [1]. (b) Higher rates raise the cost of borrowing and reduce the number of projects with a high enough return [1], so investment falls [1] and AD shifts left [1]. [6] Examiner insight: Say which direction the interest rate moves and why before you discuss investment. Without that link the answer jumps a step.

7. (a) Contractionary [1], to reduce AD and relieve pressure on prices [1]. (b) Expansionary [1], to raise AD, output and jobs, with little risk of higher inflation [1]. [4] Examiner insight: Give a reason tied to the situation described, not just the policy name.

8. (a) 1,500 - 5P = 600 + 5P, so 10P = 900. P = 90 [1]. Y = 1,500 - 450 = 1,050 [1]. (b) New AD: Y = 1,600 - 5P. 10P = 1,000, so P = 100 [1], Y = 1,100 [1]. (c) Price level: 10 / 90 = 11.1% [1]. Output: 50 / 1,050 = 4.8% [1]. (d) SRAS slopes upward [1], so a rightward shift of AD moves the economy along it: firms raise prices to cover higher costs and encourage more output [1]. [8] Examiner insight: Percentage changes are measured from the starting value, so divide by 90 and 1,050, not by the new values.

9. (a) Policy that aims to increase the economy’s capacity to produce [1] by improving the quantity, quality or efficiency of factors of production [1]. (b) The rail link cuts transport time and costs [1], so firms and workers are more productive and can produce more with the same resources [1], raising potential output, which shifts LRAS right [1]. [5] Examiner insight: Finish with the shift in LRAS. Describing cheaper transport without the effect on capacity does not answer the question.

10. (a) 360 bn / 12 m = 30,000 cu [1]. (b) Trained: 3 m x 30,000 x 1.12 = 100.8 bn. Others: 9 m x 30,000 = 270 bn [1]. Total 370.8 bn cu [1]. (c) 10.8 / 360 = 3.0% [1]. (d) Cost: 3 m x 1,500 = 4.5 bn cu [1]. The annual gain of 10.8 bn is 2.4 times the cost, if the gain lasts [1]. [6] Examiner insight: A comparison needs both figures stated in the same units. Add a condition, such as the gain lasting, to show judgement.

11. Cost-push inflation means SRAS has shifted left, so higher interest rates address the wrong problem [1]. A rate rise shifts AD left [1]. The price level falls or rises more slowly, but real output falls and unemployment rises further [1]. Supply-side policy such as training or infrastructure raises productivity and lowers costs [1], shifting SRAS and LRAS right, so output and jobs rise while the price level is lower [1]. However, supply-side policy takes years and is costly, and firms may not use new skills [1]. A rate rise acts faster on demand-pull pressure [1]. Judgement: supply-side measures fit better with cost-push inflation and rising unemployment, though they cannot offer a quick fix [1]. [8] Examiner insight: Evaluation needs a reason for each point and a conclusion that depends on the situation given, such as the cause of inflation.

Where marks are usually lost

• Defining monetary policy with one tool only.
• Saying lower interest rates make saving more attractive.
• Working out percentage changes from the new value instead of the starting value.
• Describing a policy without linking it to a component of AD or to AS.
• Treating a supply-side measure as a shift of AD.
• Quoting a rate change in cu or a cu change as a percentage.
• Forgetting to say which direction the equilibrium price level and output move.
• Writing evaluation without a reason or a conclusion.

Next steps

• Re-read the revision notes and the study guide.
• Check the course hub and the checklist.
• 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, version 2, published by Cambridge University Press & Assessment. These questions cover sections 5.3 and 5.4.