Cambridge IGCSE Economics: Fiscal policy measures and monetary policy (0455) – 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.

This set tests sections 4.3.7 to 4.3.9 and 4.4.1 to 4.4.3 of the Cambridge IGCSE Economics 0455 syllabus for examination in 2026. All countries and figures are invented. Teaching is in the study guide and the revision notes. Other links: the Cambridge IGCSE Economics hub, the printable checklist and the free diagnostics.

Questions

1. Define fiscal policy. [2]

2. Country C (invented) plans the following, in units of currency. Revenue: income tax 55, sales tax 38, corporation tax 22, other 10. Spending: health 60, education 41, defence 19, infrastructure 9, interest on debt 8. National output is 600.

(a) Calculate total revenue and total spending. [2] (b) Work out the budget balance and say whether it is a deficit or a surplus. [2] (c) Express the balance as a percentage of national output. [1]

3. Country D (invented) has revenue of 96 and spending of 88.

(a) Calculate the budget balance. [1] (b) Explain two ways the government might use it. [2]

4. Country D’s sales tax rate falls from 15% to 12% on a taxable base of 400.

(a) Calculate the change in sales tax revenue if the base does not change. [2] (b) Explain why the actual change might be smaller. [2]

5. Explain how higher government spending on road building could reduce unemployment. [4]

6. Define money supply and monetary policy. [3]

7. A household in Country D borrows 150,000 at an interest rate of 3%. The rate rises to 5%.

(a) Calculate the extra interest per year and per month. [2] (b) Explain how the rise could reduce spending by households and firms. [3]

8. In Country C, 1 C-unit = 2.5 D-units. The rate falls to 1 C-unit = 2.0 D-units.

(a) A C-made good costs 50 C-units. Calculate its price in D-units before and after, and the percentage change. [3] (b) A D-made good costs 100 D-units. Calculate its price in C-units before and after. [2] (c) Explain one effect of the change on Country C’s balance of payments. [2]

9. In Country E (invented) the first 10 units of income are tax free. The rest is taxed at 20%.

(a) Calculate the tax paid, and the tax as a percentage of income, for a worker earning 20 and a worker earning 50. [3] (b) Explain why this tax is progressive. [1] (c) Explain how the government could use the revenue to redistribute income. [2]

10. Explain how a cut in the interest rate could raise economic growth but also risk higher inflation. [5]

11. Country A (invented) has inflation of 9%, unemployment of 3% and a current account deficit. The government is considering a rise in the interest rate or a rise in income tax. Evaluate which is the better choice. [8]

Answers

1. The use of government spending [1] and taxation [1] to influence the economy and achieve macroeconomic aims. [2] Examiner insight: A definition that names only one lever, tax or spending, is incomplete; name both.

2. (a) Revenue: 55 + 38 + 22 + 10 = 125 [1]. Spending: 60 + 41 + 19 + 9 + 8 = 137 [1]. (b) 125 − 137 = −12 [1], so a deficit of 12 [1]. (c) 12 ÷ 600 × 100 = 2.0% [1]. Examiner insight: Show the sums that give each total; a correct balance with no working is hard to credit if one total is wrong. Name the result as deficit or surplus.

3. (a) 96 − 88 = +8 (a surplus) [1]. (b) Two of: repay national debt, which lowers future interest payments [1]; pay for extra spending or a tax cut in a later year [1]. Keeping a reserve against a future fall in revenue is another valid use. [2] Examiner insight: Two uses with a short reason each earn more than two bare labels; avoid giving the same idea twice in different words.

4. (a) Old revenue: 0.15 × 400 = 60 [1]. New revenue: 0.12 × 400 = 48, so revenue falls by 12 [1]. (b) Lower tax reduces prices, so buyers may buy more [1]; the taxable base grows, so the fall in revenue is less than 12 [1]. Examiner insight: Answer (b) with a cause and its effect on the base. Saying “people spend more” without linking it to revenue stops short.

5. The government pays construction firms [1], which hire workers and buy materials [1]. Workers and suppliers spend their extra income in shops and firms [1], which sell more and hire more staff, so unemployment falls [1]. [4] Examiner insight: A chain in which each step leads to the next gains credit; a list of words such as “jobs, spending, growth” does not show reasoning.

6. Money supply: the total amount of money in an economy [1]. Monetary policy: use of interest rates, the money supply and the exchange rate [1] to influence the economy and achieve macroeconomic aims [1]. [3] Examiner insight: Name all three levers in the definition. Do not describe monetary policy as the same thing as taxation.

7. (a) 150,000 × (0.05 − 0.03) = 3,000 a year [1]; 3,000 ÷ 12 = 250 a month [1]. (b) Loans become dearer, so households have less income left to spend or borrow less [1]. Firms find fewer projects earn more than the cost of borrowing [1], so they cut investment [1]. [3] Examiner insight: Cover both households and firms when the question names both. State the direction of change, for example “spend less”.

8. (a) Before: 50 × 2.5 = 125 D-units [1]. After: 50 × 2.0 = 100 D-units [1]. Change: (100 ÷ 125 − 1) × 100 = −20% [1]. (b) Before: 100 ÷ 2.5 = 40 C-units [1]. After: 100 ÷ 2.0 = 50 C-units [1]. (c) C-made exports are cheaper abroad, so foreign buyers may buy more [1]; imports cost more, so C buyers may buy fewer [1]. The balance of payments may improve if demand is price elastic enough. [2] Examiner insight: Divide to convert an import into home currency and multiply to convert an export; check your direction using the size of the rate. State a percentage with its sign or the word “fall”.

9. (a) Worker on 20: taxable 10, tax 2, 2 ÷ 20 × 100 = 10% [1]. Worker on 50: taxable 40, tax 8 [1], 8 ÷ 50 × 100 = 16% [1]. (b) The share of income paid as tax rises as income rises [1]. (c) Spend revenue on health, education or welfare payments aimed at low-income households [1], so their living standards rise relative to higher earners [1]. [2] Examiner insight: Define progressive by the rising share, not just by the higher amount. Link the use of revenue to who benefits.

10. A lower rate makes borrowing cheaper [1]. Households spend more and firms invest more [1]. Firms receive more orders and produce more, so output grows [1]. If firms cannot raise output as fast as spending grows, they raise prices [1]. A lower interest rate may also lower the exchange rate, making imports dearer and raising costs [1]. [5] Examiner insight: Give both sides, growth and inflation, and link them by the same cause. A one-sided chain is unlikely to earn full credit.

11. A strong answer draws on points such as these, and ends with a reasoned judgement.

• A higher interest rate raises the cost of borrowing, so households and firms spend less, easing price rises [1].
• It may attract foreign savers and raise the exchange rate, making imports cheaper and reducing import costs [1], but making exports dearer and so worsening the current account [1].
• Time lags and banks not passing on the full rise may delay the effect [1].
• A rise in income tax cuts take-home pay, reducing spending including on imports, which eases prices and the deficit [1].
• Unemployment is already low at 3%, so some rise is affordable; but the tax hits all workers and may be unpopular, and firms may cut jobs [1].
• Judgement, such as: the rate rise is better if much inflation is from import costs, because a stronger currency helps; the tax rise is better if a quick, direct cut in spending is needed; combining both may be best. The answer must state which is preferred and why. [2] [8] Examiner insight: An evaluation gains most when it picks one option and says what the choice depends on. Do not stop at a list of advantages and disadvantages.

Where marks are usually lost

• Writing spending − revenue and calling the result the balance.
• Leaving off the words deficit or surplus after the figure.
• Treating a tax cut as always reducing revenue by the full amount.
• Giving a measure without a step-by-step chain to the aim.
• Multiplying when a conversion needs dividing, or the reverse.
• Mixing up appreciation and depreciation.
• Confusing a change in the interest rate with a change in the money supply.
• Listing evaluation points with no judgement or condition.
• Using aggregate demand when the answer can be given through spending and jobs.

Next steps

• Re-read the study guide for any part that cost you marks.
• Revise from the revision notes.
• Check the Cambridge IGCSE Economics hub and tick off the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge IGCSE Economics 0455 syllabus for examination in 2026, version 2, published by Cambridge University Press & Assessment: sections 4.3.7 to 4.3.9 and 4.4.1 to 4.4.3.