Cambridge O Level Economics: Money, banking and household spending, saving and borrowing (2281) – 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 3.1.1, 3.1.2 and 3.2.1 of the Cambridge O Level Economics 2281 syllabus for examination in 2026 (topic 3, Microeconomic decision makers). The syllabus is not tiered. All countries, households and figures are invented. Calculators may be used. Learn the content first from the study guide and the revision notes. The course hub and printable checklist show what else to cover, and the wider topic has its own practice set.

Questions

1. Define money. [2]

2. Explain two functions of money, giving an example of each. [4]

3. A village with 8 goods uses barter.

(a) Calculate how many exchange rates it needs if every pair of goods has its own rate. [2] (b) Explain one other problem of barter that money solves. [2]

4. A community proposes using rare seashells as money. Assess the idea using two characteristics of good money. [4]

5. In Country A the price index rises from 100 to 160. (a) Calculate the percentage of its original purchasing power that money keeps. [2] (b) Explain what this means for money as a store of value. [2]

6. Explain two roles of a central bank. [4]

7. Explain why commercial banks are important to: (a) producers [2] (b) consumers [2] (c) the government [2]

8. A small bank has deposits of 500,000 units. It lends 60 per cent at 10 per cent interest and pays depositors 4 per cent on all deposits. (a) Calculate its gross interest margin. [4] (b) Explain why it does not lend all its deposits. [1]

9. Household A has a disposable income of 5,000 a month and spends 4,000. Household B has 1,500 and spends 1,440. (a) Calculate the saving ratio of each household. [4] (b) Explain two reasons why their saving ratios may differ. [4]

10. Ali borrows 7,200 units on a flat-rate loan repaid over 3 years in 36 equal monthly instalments. (a) At 9 per cent a year, calculate the total repaid and the monthly instalment. [3] (b) The rate is 12 per cent instead. Calculate the extra paid each month and in total. [3] (c) Explain how a higher rate may affect a household’s decision to borrow. [3]

11. A household saves 4,000 units for 2 years at 3 per cent a year. (a) Calculate the interest earned with simple interest and with compound interest. [3] (b) If the rate is 6 per cent and inflation 2 per cent, estimate the real rate. [2]

12. In Country B a household’s disposable income falls from 3,000 to 2,400 a month and its spending from 2,700 to 2,280. The central bank then cuts interest rates. (a) Calculate the percentage change in income and in spending, the new saving, and the saving ratios before and after. [4] (b) Evaluate whether the rate cut will increase this household’s spending. [6]

Answers

1. Anything generally accepted as a means of payment for goods and services [1] and in settlement of debts [1]. [2] Examiner insight: A definition earns more when it states acceptance as payment; “cash” or “notes and coins” alone leaves out bank deposits.

2. Medium of exchange: accepted in payment [1], e.g. a worker is paid wages in money and buys food [1]. Unit of account: prices and wages are measured in it [1], e.g. a shirt priced at 20 units is easy to compare with a haircut at 8 [1]. (Store of value or standard of deferred payment also gain credit.) [4] Examiner insight: For each function, a one-line meaning plus a short example is the safest way to show you understand it, not just name it.

3. (a) Pairs = 8 × 7 ÷ 2 [1] = 28 exchange rates [1]. [2] (b) Barter needs a double coincidence of wants [1]: a seller must want what the buyer offers at the same time, but with money the seller accepts it and spends it later [1]. [2] Examiner insight: Show the formula or the pairs working, since a bare number gives the marker nothing to reward if it is wrong. State the barter problem and then say how money solves it.

4. Scarcity: they are limited in supply, so they keep value [1], but if shells can be gathered freely the supply may rise and value fall [1]. Divisibility or portability: small shells are light and easy to carry [1], but they cannot be split to give exact change and are not uniform in size, so some are worth more [1]. [4] Examiner insight: An assessment answer gives a point in favour and a point against for each characteristic; one-sided answers show only part of the thinking.

5. (a) 100 ÷ 160 × 100 [1] = 62.5 per cent [1]. [2] (b) Money now buys only 62.5 per cent as much, a 37.5 per cent fall [1], so savings lose purchasing power and it works less well as a store of value [1]. [2] Examiner insight: Mixing up the 60 per cent price rise with the loss of purchasing power is common; the second is found by dividing, not by repeating the 60.

6. Banker to the government: holds its accounts and handles its borrowing and payments [1], so the state can pay for its spending [1]. Lender of last resort: lends to a sound bank short of cash [1], preventing panic that would hurt depositors and the economy [1]. (Issuing notes and coins, carrying out monetary policy and supervising banks also gain credit.) [4] Examiner insight: Naming a role earns little by itself; add a reason it matters, because the question asks for explanation.

7. (a) Banks give loans and overdrafts [1], so firms can buy equipment or cover a gap before customers pay [1]. [2] (b) Banks provide safe places to save and a way to pay [1] and lend through mortgages and loans so households can spend ahead of income [1]. [2] (c) Banks lend to the government by buying its debt [1] and help collect and move tax and benefit payments [1]. [2] Examiner insight: Each part needs a point specific to that group; a general sentence about “providing loans” used three times will not fit all three.

8. (a) Lent: 500,000 × 0.60 = 300,000 [1]. Interest received: 300,000 × 0.10 = 30,000 [1]. Interest paid: 500,000 × 0.04 = 20,000 [1]. Margin: 30,000 − 20,000 = 10,000 units [1]. [4] (b) It must keep part back to meet withdrawals [1]. [1] Examiner insight: The bank pays interest on all deposits but earns it only on the part lent; applying 4 per cent to only the lent part is a common slip.

9. (a) A: saving 5,000 − 4,000 = 1,000 [1]; 1,000 ÷ 5,000 × 100 = 20 per cent [1]. B: 1,500 − 1,440 = 60 [1]; 60 ÷ 1,500 × 100 = 4 per cent [1]. [4] (b) Income: A’s income is higher, so after essentials more is left to save [1], while B must spend nearly all its income on necessities [1]. Confidence or debts: B may be repaying debt or fear job loss, which affects its choice [1], while A, secure about future income, may save for a goal [1]. (Other valid factors: dependants, age, attitude to risk.) [4] Examiner insight: A comparison answer links the factor to both households; saying “A earns more” gains credit only when you explain why that changes saving.

10. (a) Interest 7,200 × 0.09 × 3 = 1,944 [1]. Total 7,200 + 1,944 = 9,144 [1]. Instalment 9,144 ÷ 36 = 254 [1]. [3] (b) At 12 per cent: interest 7,200 × 0.12 × 3 = 2,592 and total 9,792 [1]. Instalment 9,792 ÷ 36 = 272, so 18 extra a month [1]. Total extra 9,792 − 9,144 = 648 [1]. [3] (c) A higher rate raises the cost of borrowing [1], so repayments take more of income [1], and households may borrow less or delay purchases; the effect is smaller if the purchase is a necessity or confidence is high [1]. [3] Examiner insight: An extension or evaluative remark, such as how strongly the change affects a household, helps lift a developed answer beyond a simple cost statement.

11. (a) Simple: 4,000 × 0.03 × 2 = 240 [1]. Compound: 4,000 × 1.03² = 4,243.60 [1], so interest 243.60 [1]. [3] (b) Real rate is about nominal minus inflation [1] = 6 − 2 = 4 per cent [1]. [2] Examiner insight: Compound questions need the final amount minus the original sum; giving 4,243.60 as the “interest” is the usual error.

12. (a) Income: (2,400 − 3,000) ÷ 3,000 = −20 per cent; spending: (2,280 − 2,700) ÷ 2,700 = −15.6 per cent [1]. Saving before 3,000 − 2,700 = 300 [1]; after 2,400 − 2,280 = 120 [1]. Saving ratio 10 per cent before, 5 per cent after [1]. [4] (b) A lower rate makes borrowing cheaper and saving less rewarding [1], so spending may rise [1]. But income has fallen 20 per cent and the household is saving less [1], so it may borrow to keep its spending up or cut it further [1]. Confidence could be low after the fall in income, so it may not borrow [1]. Judgement: the rate cut helps only if confidence and income recover; with income falling, I expect the effect to be small, but it would be larger if lenders are keen [1]. [6] Examiner insight: A strong evaluation reaches a judgement and gives the reason behind it, such as which factor is likely to outweigh the others for this household.

Where marks are usually lost

• Writing only “cash” for money and leaving out bank deposits.
• Naming a function or role with no explanation or example.
• Confusing the central bank with a commercial bank.
• Not showing working for percentages, ratios and interest.
• Mixing up a price rise of 60 per cent with the loss of purchasing power it causes.
• Giving only one side in a question that says assess or evaluate.
• Stating that higher interest rates always reduce spending, without mentioning confidence, debt or income.
• Giving general points on banks without tying them to the group named.

Next steps

• Review the revision notes.
• Reread the study guide.
• See the course hub and the checklist.
• Take the free 10-minute diagnostics and see the past papers page.
• Book a free trial class.

Official syllabus

Cambridge O Level Economics 2281, syllabus for examination in 2026, version 2, published by Cambridge University Press and Assessment (Cambridge International). Sections 3.1.1, 3.1.2 and 3.2.1.