Cambridge A Level Economics: MNCs, FDI, external debt, the IMF and World Bank (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 syllabus outcomes 11.5.3 to 11.5.7 in the Cambridge International AS and A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topic 11 is A Level content only. All firms, countries and figures are invented for illustration. Answers show each creditworthy step with a mark in square brackets, and the bold figure at the end is the question total.

Links: study guide, revision notes, course hub, checklist and free 10-minute diagnostics.

Questions

1. Define a multinational company. [2]

2. Define foreign direct investment and explain how it differs from portfolio investment. [3]

3. A subsidiary of an MNC in Country D earns a profit of 8.0 million D-units before any internal charges. Country D taxes profit at 25%. The parent charges the subsidiary 3.0 million for services, and that income is taxed at 5% in the country where it is received. Calculate the tax Country D loses and the saving to the group. [4]

4. Explain two ways in which an MNC could benefit a low-income host country. [4]

5. Country D has GDP of 1,500 million D-units. A foreign firm makes an FDI inflow of 90 million. In the first year it sends 12 million of profit abroad. Calculate (a) the FDI inflow as a percentage of GDP, (b) the profit outflow as a percentage of the inflow, and (c) the inflow minus the profit outflow. [3]

6. Country C has external debt of 900 million foreign currency units (FCU), GNI of 2,500 million FCU, export earnings of 300 million FCU and annual debt service of 66 million FCU. (a) Calculate the debt to GNI ratio and the debt service ratio. [2] (b) Export earnings fall by 20% and debt service is unchanged. Calculate the new debt service ratio and comment on the change. [2]

7. Explain two possible causes of a rise in a country’s external debt. [4]

8. Country C owes 400 million FCU. The exchange rate moves from 1 FCU = 3.0 C-units to 1 FCU = 3.6 C-units. (a) Calculate the debt in C-units before and after, and the percentage rise. [3] (b) Explain one consequence of this change for the government’s budget. [1]

9. Explain two roles of the International Monetary Fund. [4]

10. An IMF loan to Country C requires the government to cut spending by 60 million FCU. GDP is 1,000 million FCU and the multiplier is 2. (a) Calculate the fall in GDP and express it as a percentage of GDP. [2] (b) Explain why the government might still accept the loan. [2] (c) Evaluate one possible long-run benefit and one cost of such conditions. [2]

11. Country C could borrow 120 million FCU from the World Bank at 2% interest or from commercial lenders at 6%. (a) State two roles of the World Bank. [2] (b) Calculate the annual interest on each loan and the difference. [3]

12. Evaluate whether FDI by an MNC in a low-income country is likely to raise living standards. [8]

Answers

1. A firm that owns or controls production or service operations [1] in more than one country [1]. [2] Examiner insight: A definition with only “large” or “global” in it describes size, not what makes a firm multinational; state the operations in more than one country.

2. FDI is investment in productive assets or a controlling stake in a business [1] in another country, such as building a factory [1]. Portfolio investment is buying shares or bonds without control and can be sold quickly, whereas FDI is a longer-term commitment [1]. [3] Examiner insight: The contrast is worth a separate point, so name both control and permanence rather than only saying that one is “bigger”.

3. Tax before charge: 8.0 × 0.25 = 2.0 million [1]. Reported profit: 8.0 − 3.0 = 5.0; tax 5.0 × 0.25 = 1.25 million, so Country D loses 0.75 million [1]. Tax abroad: 3.0 × 0.05 = 0.15 million [1]. Group tax: 1.25 + 0.15 = 1.40 million against 2.0, so the group saves 0.60 million [1]. [4] Examiner insight: Work out the tax both before and after the charge and subtract; stating only the new tax figure does not show the loss to the host.

4. Any two developed points. Example one: jobs and wages [1], because the MNC employs local workers, raising incomes and spending, and training raises productivity [1]. Example two: technology and capital [1], because new methods and machinery raise output and long-run supply [1]. Other creditworthy points: tax revenue funding public services, or exports earning foreign currency. [4] Examiner insight: Each benefit needs its link to a result such as higher income or output. A list of benefits with no explanation earns little.

5. (a) 90 ÷ 1,500 × 100 = 6.0% [1]. (b) 12 ÷ 90 × 100 = 13.3% (13.3 to one decimal place) [1]. (c) 90 − 12 = 78 million [1]. [3] Examiner insight: Show the division and keep the units (percentage or million D-units) for each part; three bare numbers are hard to follow.

6. (a) Debt to GNI = 900 ÷ 2,500 × 100 = 36% [1]; debt service ratio = 66 ÷ 300 × 100 = 22% [1]. (b) Exports: 300 × 0.80 = 240; ratio = 66 ÷ 240 × 100 = 27.5% [1]. A larger share of export earnings goes on debt service, leaving less for imports and public spending [1]. [4] Examiner insight: “Comment” needs a consequence of the figure, such as less money for other uses, not just a repeat of the higher percentage.

7. Any two developed causes. Example one: persistent current account deficits [1], funded by borrowing from abroad because imports exceed exports [1]. Example two: a fall in export earnings [1], from a lower price of the main export, so repayments take a larger share and new loans are needed [1]. Other creditworthy causes: rising interest rates on variable-rate loans, or depreciation raising the home cost of foreign-currency debt. [4] Examiner insight: Name the cause and then show how it increases the amount owed or borrowed; “the country is poor” is a description, not a cause.

8. (a) Before: 400 × 3.0 = 1,200 million C-units [1]. After: 400 × 3.6 = 1,440 [1]. Rise: 240 ÷ 1,200 × 100 = 20% [1]. (b) Debt service takes more of tax revenue in C-units, so less is left for spending on services, or taxes must rise [1]. [4] Examiner insight: Convert the same FCU amount at both rates and compare, rather than comparing the two exchange rates alone.

9. Any two roles with detail. Example one: surveillance [1], monitoring economies and exchange-rate policies and giving advice [1]. Example two: temporary lending [1] to countries with balance of payments problems, so they can finance imports [1]. Other creditworthy roles: conditionality (policy conditions meant to correct the problem) and technical assistance for officials. [4] Examiner insight: Name the role and then say what it does or why; the IMF is about short-run payments problems, not general development funding.

10. (a) GDP falls by 60 × 2 = 120 million [1], which is 120 ÷ 1,000 × 100 = 12% [1]. (b) The loan fills a financing gap and avoids a disorderly fall in the exchange rate or a default [1], and it can restore confidence among other lenders [1]. (c) Benefit: reforms such as lower deficits or better tax collection could raise competitiveness and growth [1]. Cost: lower output, jobs and public services in the short run, and lasting damage if the cuts hit education or health [1]. [6] Examiner insight: Part (c) asks for a judgement, so say which effect matters more or what it depends on rather than only stating both.

11. (a) Any two: long-term loans for development projects such as roads or power [1]; very low-interest loans or grants to reduce poverty [1]; technical advice and support for reforms. (b) World Bank: 120 × 0.02 = 2.4 million [1]. Commercial: 120 × 0.06 = 7.2 million [1]. Difference: 4.8 million a year [1]. [5] Examiner insight: Give the roles as functions, and do not use “gives aid” as a role; the IMF’s short-run lending is a different role.

12. Gains (any two developed): jobs, wages and training raise incomes and productivity [1]; capital, technology and tax revenue raise output and long-run supply [1]. Costs (any two developed): profits are sent abroad, so national income rises by less than output [1]; transfer pricing reduces the tax paid [1]; local firms may close, and working conditions or the environment may suffer [1]. Evaluation: the outcome depends on how much is sourced locally and reinvested, the host’s bargaining power and tax rules [1], the sector and whether workers gain transferable skills [1], and the short run versus the long run. Judgement: living standards are more likely to rise when the host captures a large share of the value added [1]. [8] Examiner insight: A balanced answer ends with a reasoned conclusion that names the conditions on which the outcome depends, not a restatement of the points.

Where marks are usually lost

• Defining FDI or an MNC without control or operations in more than one country.
• Showing only the new tax figure in a transfer pricing calculation.
• Quoting a ratio without saying what it implies.
• Forgetting that a depreciation raises the home-currency cost of foreign-currency debt.
• Listing IMF or World Bank roles with no explanation.
• Treating the IMF and World Bank as the same.
• Stating austerity effects with no estimate or no long-run view.
• Concluding without saying what the outcome depends on.

Next steps

• Re-read the revision notes and the study guide.
• See the course hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class at /trial/.

Official syllabus

Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International), outcomes 11.5.3 to 11.5.7.