Pearson Edexcel International GCSE Economics: Inflation, deflation and the CPI (4EC1) – 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 2.1.1 b), low and stable inflation, of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026, a single-tier course. Country T, its firms and all figures are invented and illustrative. Learn the content from the study guide and revision notes. The course hub and checklist show the whole course, and the free diagnostics test you across topics.

Country T’s basket for the CPI has four groups. The base year is 2024 (all groups 100).

Group	Weight	Index in 2025
Food	40	112
Transport	25	104
Housing	20	108
Other items	15	96

Questions

1. What is meant by deflation? [2]

2. Calculate the CPI for Country T in 2025. Show your working. [3]

3. The CPI in Country T rose from 106.8 in 2025 to 111.1 in 2026. Calculate the rate of inflation, to 1 decimal place. [2]

4. In Country U the CPI fell from 100.0 to 98.2 in one year. Calculate the rate of change and state what it is called. [3]

5. Explain how a rise in interest rates could reduce inflation. [3]

6. A teacher in Country T earns KD 3,200 a month. Her pay rises to KD 3,360, while prices rise 6.2%. Calculate the percentage rise in her pay, and her new pay in terms of last year’s prices. Is she better off? [4]

7. Explain what is meant by menu costs and by shoe leather costs. [4]

8. Furniture makers in Country T face a 15% rise in the cost of timber and energy. Analyse how this could lead to higher unemployment. [6]

9. A chair costs KD 80 in Country T and in Country V. Over a year, prices rise 7% in Country T and 2% in Country V. The exchange rate does not change. Calculate each chair’s new price, then explain the likely effect on Country T’s exports. [5]

10. A building firm in Country T plans to borrow KD 150,000 for a machine expected to return 4.5% a year. Inflation has risen to 6%, and the interest rate on the loan may rise from 3% to 6%. (a) Calculate the yearly interest at 3% and at 6%. [2] (b) Assess how high inflation could affect investment and business and consumer confidence. [8]

11. Country T has demand-pull inflation. Evaluate whether raising interest rates is the best response. [10]

Answers

1. A sustained fall [1] in the general level of prices [1]. [2] Examiner insight: A definition has two parts, so name both the idea of a fall and that it is general and lasting. A fall in one price is not deflation, so say the fall is general.

2. Weight × index: 40 × 112 = 4,480; 25 × 104 = 2,600; 20 × 108 = 2,160; 15 × 96 = 1,440 [1]. Total = 10,680 [1]. CPI = 10,680 ÷ 100 = 106.8 [1]. [3] Examiner insight: Show each product and the total so that your method is easy to follow; a bare number gives a reader nothing to check.

3. Change = 111.1 − 106.8 = 4.3 [1]. 4.3 ÷ 106.8 × 100 = 4.0% [1]. [2] Examiner insight: Divide by the old CPI. Using 111.1 as the denominator gives 3.9% and is a common slip.

4. (98.2 − 100.0) ÷ 100.0 × 100 [1] = −1.8% [1]. A fall in the general price level is deflation [1]. [3] Examiner insight: Keep the minus sign. Writing 1.8% suggests inflation and risks losing the point, and the term should be named when asked.

5. Higher interest rates make borrowing dearer and saving more rewarding [1]. Households and firms cut spending and investment, so aggregate demand falls or grows more slowly [1]. Firms face less pressure to raise prices, so inflation falls [1]. [3] Examiner insight: Build a chain of linked steps. Saying “it reduces spending” without why it reduces spending is only part of a chain.

6. Pay rise = (3,360 − 3,200) ÷ 3,200 × 100 = 5.0% [1]. Real pay = 3,360 ÷ 1.062 [1] = KD 3,163.8 [1], which is less than 3,200 so she is worse off (real pay down about 1.1%) [1]. [4] Examiner insight: Give the conclusion, backed by your figure. A pay rise smaller than the rise in prices is a real fall, whatever the pay packet shows.

7. Menu costs are the costs to firms of changing prices [1], such as reprinting menus or relabelling goods [1]. Shoe leather costs are the time and effort spent protecting the value of money [1], such as visiting several shops to compare prices or moving savings between accounts [1]. [4] Examiner insight: Give one example for each term. Swapping the two definitions is the usual error.

8. Higher timber and energy costs raise the makers’ average costs [1]. To keep profit they raise prices, so quantity demanded falls [1]. Firms sell fewer chairs and tables and cut production [1], so they need fewer workers [1]. Some makers cannot cover their costs and close [1]. Workers laid off may lack skills for other jobs, so unemployment rises [1]. [6] Examiner insight: Link each step to the next with a reason such as “so” or “which means”. A list of effects without the reasoning stays on the surface.

9. Country T: 80 × 1.07 = KD 85.60 [1]. Country V: 80 × 1.02 = KD 81.60 [1]. Country T’s chair is KD 4.00 dearer [1], so foreign buyers switch to the cheaper Country V chair [1]. Country T’s export sales fall, along with revenue and perhaps jobs [1]. [5] Examiner insight: The exchange-rate condition in the question matters. Refer to the gap between the two prices, not to Country T’s price alone.

10. (a) 150,000 × 3% = KD 4,500 [1]. 150,000 × 6% = KD 9,000 [1]. [2] (b) High inflation makes future costs and sales hard to predict, so the firm is less sure of the return on the machine [1]. Uncertainty makes the firm delay investment [1]. If interest rises to 6%, the loan costs KD 9,000 but the machine returns only KD 6,750 (4.5%), a loss of KD 2,250 a year [1], so the firm is likely to cancel [1]. Lower investment reduces future capacity [1]. Consumers worried about rising prices may cut spending, so the firm expects fewer orders [1]. This fall in confidence further discourages investment [1]. Judgement: the effect is largest if inflation is unpredictable and interest rates rise; if inflation stays steady and expected, firms may still invest [1]. [8] Examiner insight: Use the figures given. Comparing the KD 6,750 return with each interest cost is stronger than saying interest rates may affect investment.

11. For: higher rates raise borrowing costs, so spending and investment fall [1]. Saving becomes more attractive [1]. Falling demand eases pressure on prices [1]. Rates can be changed quickly and act across the whole economy [1]. Against: the effect takes time to work through [1]. Lower spending can reduce output and raise unemployment [1]. Borrowers with variable-rate debts suffer [1]. Higher rates may raise firms’ costs, which does nothing for cost-push pressure [1]. Alternatives such as reducing government spending or raising taxes also cut demand, but are slower to agree and may be unpopular [1]. Judgement: higher interest rates suit demand-pull inflation well, because they target demand, especially when the economy is near capacity; the best response also depends on how high inflation is and how fragile growth is [1]. [10] Examiner insight: A supported conclusion needs a reason, such as the cause of the inflation. Naming the cause is stronger than saying “it depends”.

Where marks are usually lost

• Definitions missing “general” or “sustained”.
• Dividing by the new CPI rather than the old one.
• Dropping the minus sign when prices fall.
• Reading a CPI of 106.8 as 106.8% inflation.
• Comparing nominal pay with prices without converting to real terms.
• Swapping menu costs and shoe leather costs.
• Listing effects of inflation without a chain of reasoning.
• Ignoring the data in the question, such as the loan return or the exchange rate.
• Concluding “it depends” without saying on what.

Next steps

• Re-read the study guide and the revision notes.
• Plan your timing with exam preparation.
• Open the course hub and tick off topics on the checklist.
• Take the free diagnostics.
• Book a free trial class.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1), Specification Issue 3, February 2026, for first teaching September 2017, published by Pearson Education Limited. Section 2.1.1 b), Low and stable inflation.