Cambridge IGCSE Economics: Inflation and deflation (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.

These questions cover section 4.8, Inflation and deflation, of the Cambridge IGCSE Economics syllabus for examination in 2026. The course is not tiered. All countries, firms and figures are invented. Learn the content first from the study guide and the revision notes. The course hub and checklist are linked below too.

Questions

1. (a) Define inflation. [1] (b) In Country A the inflation rate falls from 4% to 2%. Explain why this is not deflation. [2]

2. Country B’s CPI uses four groups with weights of 35, 25, 20 and 20. The CPI in 2025 was 104.25. In 2026 the group indices (base year 2020 = 100) were 108, 113, 104 and 97, in the same order. (a) Calculate the CPI for 2026. [2] (b) Calculate the rate of inflation for 2026 to one decimal place. [2] (c) The fourth group’s index fell from 98 to 97, while the indices of the other three groups all rose. Explain why the CPI still rose. [1]

3. Country E’s CPI falls from 125 to 120. Calculate the rate of change and state what it shows. [3]

4. State whether each is more likely to cause demand-pull or cost-push inflation. (a) A government cuts income tax and raises its spending when firms are already near full capacity. [1] (b) Dock workers across a country win a 9% pay rise with no gain in output per worker. [1] (c) The world price of an imported fuel rises sharply. [1]

5. Explain how a rise in consumer confidence could lead to demand-pull inflation. [4]

6. A small laundry in Country F washes 4,000 loads a month. Monthly costs are detergent 2,000, wages 9,000, energy 3,000 and rent 2,000. Detergent rises 15%, wages 4% and energy 20%. Rent is unchanged. (a) Calculate the new monthly cost. [2] (b) Calculate the percentage rise in total cost, to one decimal place. [1] (c) Explain how this is an example of cost-push inflation if many firms respond in the same way. [2]

7. Explain one cause of demand-side deflation and one cause of supply-side deflation. [4]

8. A saver in Country G puts 8,000 in an account paying 1.5% a year. Inflation is 3.5%. (a) Calculate the account balance at the end of the year. [1] (b) Calculate its value in the prices of a year earlier, to the nearest whole number. [2] (c) Explain why a borrower with a fixed-rate loan gains in this situation. [2]

9. A worker’s monthly pay rises from 3,200 to 3,296. Over the same year the CPI rises from 120.0 to 124.8. (a) Calculate the percentage rise in pay. [1] (b) Calculate the percentage rise in the CPI. [1] (c) Calculate real pay in each year (pay ÷ CPI × 100) and state what happened to the worker’s buying power. [2]

10. Explain two consequences of deflation for firms and one for the economy as a whole. [6]

11. Country H has inflation of 7%. Most of it comes from a rise in the price of imported energy. The central bank is considering a rise in interest rates. Evaluate whether this is the best policy. [8]

12. Country J has deflation of 2% a year, caused by weak consumer spending and falling export orders. Discuss which policies the government might use and how effective they are likely to be. [8]

Answers

1. (a) A sustained rise in the general level of prices [1]. [1] (b) Prices are still rising [1], only more slowly [1]. Deflation requires the price level to fall, meaning a negative inflation rate. [2] Examiner insight: Answers gain credit when they say prices still rise and when they distinguish level from rate; just saying “it is lower” is a description of the figures, not an explanation.

2. (a) Weight × index: 35 × 108 = 3,780; 25 × 113 = 2,825; 20 × 104 = 2,080; 20 × 97 = 1,940. Total = 10,625 [1]. 10,625 ÷ 100 = 106.25 [1]. [2] (b) (106.25 − 104.25) ÷ 104.25 × 100 [1] = 1.9% [1]. [2] (c) The other three groups, with a combined weight of 80, all rose, so they outweighed the small fall in a group with weight 20 [1]. [1] Examiner insight: Writing out the weight-times-index line for each group makes the working visible and lets a small slip be traced. Divide by the sum of the weights, here 100.

3. Change = (120 − 125) ÷ 125 × 100 [1] = −4.0% [1]. A negative rate means prices fell on average: deflation [1]. [3] Examiner insight: Dividing by the old value, not the new one, is the usual point of difference between a correct and an incorrect result. Naming deflation in words completes the answer.

4. (a) Demand-pull, because demand rises when the economy cannot produce more [1]. (b) Cost-push, because wage costs rise without output rising [1]. (c) Cost-push, because input costs rise [1]. [3] Examiner insight: Short classification items are secured by naming the starting point: demand rising, or costs rising. A label with no reason is weaker.

5. Higher confidence makes households more willing to spend and borrow [1]. Total demand rises [1]. If firms are near full capacity they cannot raise output quickly, so they raise prices and offer higher wages to attract workers [1]. The general price level rises [1]. [4] Examiner insight: A good chain has each step leading to the next. Answers that jump from confidence to higher prices miss the link of demand exceeding what the economy can supply.

6. (a) Detergent 2,000 × 1.15 = 2,300; wages 9,000 × 1.04 = 9,360; energy 3,000 × 1.20 = 3,600 [1]. New total = 2,300 + 9,360 + 3,600 + 2,000 = 17,260 [1]. [2] (b) (17,260 − 16,000) ÷ 16,000 × 100 = 7.9% [1]. [1] (c) Costs of production have risen [1], so firms raise prices to protect profit, and when many do so the general price level rises [1]. [2] Examiner insight: Apply each rise to its own cost line before adding. Applying one percentage to the total gives a different figure and loses credit.

7. Demand-side: high interest rates reduce borrowing and spending [1], so firms with unsold stock cut prices [1]. Supply-side: new technology or higher productivity lowers costs of production [1], so firms can cut prices and still earn profit [1]. [4] Examiner insight: Credit tends to follow the description of how each cause reaches prices. A bare list of causes earns less than explained ones, and the two causes must be on opposite sides.

8. (a) 8,000 × 1.015 = 8,120 [1]. [1] (b) 8,120 ÷ 1.035 [1] = 7,845 [1]. [2] (c) The borrower repays a fixed sum [1], which is worth less in real terms because prices have risen, so the debt shrinks in real terms [1]. [2] Examiner insight: Real value means the amount deflated by prices. Comparing 8,120 with 8,000 alone shows a gain in money terms, which is not the point of the question.

9. (a) (3,296 − 3,200) ÷ 3,200 × 100 = 3.0% [1]. [1] (b) (124.8 − 120.0) ÷ 120.0 × 100 = 4.0% [1]. [1] (c) Real pay before = 3,200 ÷ 120.0 × 100 = 2,666.7; after = 3,296 ÷ 124.8 × 100 = 2,641.0 [1]. Real pay fell about 1.0%, so buying power fell even though money pay rose [1]. [2] Examiner insight: Pay rising slower than prices is the standard reason for a real fall. A conclusion in words after the numbers shows you understand what the figures mean.

10. Firms: falling prices cut revenue while costs such as wages and loan repayments may not fall as fast [1], so profits are squeezed [1]. A second firm consequence: firms delay investment because they expect lower prices [1]. Economy: consumers delay buying, expecting lower prices [1], so demand falls [1], output and employment fall, and a downward spiral may follow [1]. [6] Examiner insight: Each consequence needs a reason attached. Naming the group in the question, firms and then the economy, keeps the answer on target.

11. Case for: higher rates make borrowing dearer and saving more attractive, so spending falls and price pressure eases [1]. A higher rate may raise the exchange rate, which makes imported energy cheaper [1]. Case against: the inflation comes from costs, not excess demand [1], so the rise cuts output and raises unemployment while the energy price still pushes costs up [1]. The effect takes time [1]. Firms with loans face higher costs themselves [1]. Alternative: supply-side policy or reducing dependence on imported energy lowers costs over time, though slowly [1]. Judgement: higher interest rates are a weak main tool for imported cost-push inflation, useful only if a second round of wage and demand pressure appears [1]. [8] Examiner insight: Strong evaluation depends on the stated cause. Answers that apply the standard remedy without noting the cause is imported cost-push are limited. The final judgement should be supported.

12. Monetary: cut interest rates to encourage borrowing and spending [1]. This helps only if households and firms are confident enough to borrow, and there is a limit to how far rates can fall [1]. A fall in the exchange rate would make exports cheaper and revive export orders [1], but it raises import prices [1]. Fiscal: cut taxes or raise government spending [1], accepting a budget deficit [1]. A tax cut may be saved, and a bigger deficit adds to debt [1]. Judgement: since demand is the cause, demand-side policy fits; a mix, with confidence and lags, is likely best [1]. [8] Examiner insight: Match the policy to the cause given. Credit is more likely where each measure is paired with a reason it may be limited in this case.

Where marks are usually lost

• Calling a falling inflation rate deflation.
• Dividing by the new figure in a percentage change.
• Forgetting to divide by the total of the weights.
• Applying one percentage to a total instead of each cost line.
• Not stating the meaning of a negative result in words.
• Writing about “people” instead of consumers, workers, savers, lenders or firms as asked.
• Naming a policy without explaining how it reaches prices.
• Concluding without a judgement based on the cause in the case.

Next steps

• Return to the revision notes or the study guide.
• Check your coverage on the Cambridge IGCSE Economics checklist or visit the course hub.
• Try the all free 10-minute diagnostics.
• Want live help? Book a free trial class.

Official syllabus

Cambridge IGCSE Economics syllabus for examination in 2026, section 4.8, published by Cambridge University Press & Assessment.