Pearson Edexcel International GCSE Economics: Monetary policy and controls (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 sub-topic 2.1.2 parts b) monetary policy and d) government controls in the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026. There is one tier of entry. All data are invented. Teaching is in the study guide and the revision notes. See also the course hub, the checklist and the free diagnostics.

Questions

1. Define monetary policy. [2]

2. A household has a variable-rate loan of 90,000. The interest rate rises from 4% to 6%. Calculate the extra interest paid in a year and the extra paid each month. [3]

3. Explain two ways in which a rise in interest rates could affect consumers. [4]

4. A firm borrows 60,000 for a project that is expected to add 4,200 a year to profit before interest.

(a) Calculate the yearly interest cost at 5% and at 9%. [2]

(b) Calculate the profit after interest at each rate. [2]

(c) State what the firm is likely to do at 9%. [1]

5. The consumer price index (CPI) in Country A rises from 108.0 to 112.32 in a year. The central bank’s inflation target is 2%.

(a) Calculate the inflation rate. [2]

(b) State how the central bank might change interest rates. [1]

6. (a) Explain what is meant by asset purchasing by a central bank. [2]

(b) A bond pays 6 a year. Heavy buying lifts its price from 100 to 120. Calculate the yield at each price. [2]

7. The central bank of Country A cuts interest rates and its currency falls from 4.00 to 3.20 units of Country B’s currency per A-unit. An A-unit export is priced at 25 A-units and an import at 96 B-units.

(a) Calculate the export’s price in B-units before and after the fall. [2]

(b) Calculate the import’s price in A-units before and after the fall. [2]

(c) Explain the likely effect on Country A’s current account. [2]

8. A government limits a river’s pollution with tradable pollution permits.

(a) Explain how pollution permits work. [2]

(b) State two disadvantages of pollution permits. [2]

9. A firm saves 90,000 a year by breaking a pollution law. The chance of being caught is 30% and the fine is 120,000.

(a) Calculate the expected fine. [2]

(b) Explain why the fine may not stop the firm. [1]

(c) Calculate the smallest fine that would make the expected fine exceed the saving. [1]

10. A new safety regulation costs each firm 9,000 a year. A small firm has yearly sales of 180,000 and a large firm has yearly sales of 4,500,000.

(a) Calculate the cost as a percentage of sales for each firm. [2]

(b) Explain why the regulation may harm the small firm more. [1]

(c) State one advantage and one disadvantage of legislation as a way to control firms. [2]

11. Explain how a cut in interest rates could reduce unemployment but raise inflation. [6]

12. In Country A inflation is 6.5%. Part of it comes from dearer imported fuel and part from strong consumer spending. The central bank raises interest rates from 3% to 5%. Evaluate whether this is the best response. [10]

Answers

1. The central bank’s use of changes in interest rates [1] to influence the economy, such as spending, prices and jobs [1]. [2] Examiner insight: A definition earns credit for naming who acts and what the tool is; “the government controlling money” is too vague to show either.

2. Change in rate = 6% − 4% = 2 percentage points [1]. Extra yearly interest = 90,000 x 0.02 = 1,800 [1]. Extra a month = 1,800 / 12 = 150 [1]. [3] Examiner insight: Show the multiplication, and give the time period with each answer; a bare number with no “a year” or “a month” is easy to misread.

3. Two developed points, for example: Mortgage and loan payments rise [1], leaving less disposable income, so spending on goods and services falls [1]. Saving pays more [1], so some people save instead of spend, which cuts consumption [1]. [4] Examiner insight: Each way needs a cause and an effect on spending. Listing “higher payments” and “more saving” without the link to consumption tends to gain only part credit.

4. (a) At 5%: 60,000 x 0.05 = 3,000 [1]. At 9%: 60,000 x 0.09 = 5,400 [1]. (b) At 5%: 4,200 − 3,000 = +1,200 [1]. At 9%: 4,200 − 5,400 = −1,200 [1]. (c) It will probably not go ahead, since it makes a loss [1]. [5] Examiner insight: Use the same method at both rates and show each subtraction, so every step of your working is visible.

5. (a) (112.32 − 108.0) / 108.0 = 4.32 / 108.0 [1] = 4.0% [1]. (b) Inflation is above the 2% target, so it is likely to raise rates [1]. [3] Examiner insight: Show the formula as a fraction. For part (b), give a direction and link it to the target by naming the target in your answer.

6. (a) The central bank creates money electronically [1] and uses it to buy assets, mainly government bonds [1]. (b) At 100: 6 / 100 = 6% [1]. At 120: 6 / 120 = 5% [1]. [4] Examiner insight: Asset purchasing is a separate tool from changing the policy rate. Answers that describe it as “lowering rates” without the buying of bonds miss the idea.

7. (a) Before: 25 x 4.00 = 100 B-units [1]. After: 25 x 3.20 = 80 B-units [1]. (b) Before: 96 / 4.00 = 24 A-units [1]. After: 96 / 3.20 = 30 A-units [1]. (c) Exports are cheaper abroad, so more are sold [1]. Imports are dearer at home, so fewer are bought, which tends to improve the current account [1]. [6] Examiner insight: Multiply to convert A-units to B-units and divide the other way. Marks are lost when the direction is reversed, so check that the export price falls and the import price rises.

8. (a) The government sets a limit on total pollution and issues permits that match it [1]. Firms may release only as much as their permits allow, and can usually buy or sell them [1]. (b) Any two from: the cap may be set too high; monitoring is needed; large firms may buy many permits; pollution may stay high in one area [2]. [4] Examiner insight: A disadvantage should be about permits specifically. “It costs money” is general; “the limit may be set too high” is specific to the control.

9. (a) 0.30 x 120,000 [1] = 36,000 [1]. (b) The expected fine of 36,000 is less than the saving of 90,000, so breaking the law still pays [1]. (c) 90,000 / 0.30 = 300,000, so any fine above this [1]. [4] Examiner insight: Compare the expected fine with the saving, not the headline fine with the saving. The headline fine looks large but ignores the chance of being caught.

10. (a) Small: 9,000 / 180,000 x 100 = 5.0% [1]. Large: 9,000 / 4,500,000 x 100 = 0.2% [1]. (b) The same fixed cost takes a much bigger share of a small firm’s sales [1]. (c) Advantage: it applies to everyone and has legal force [1]. Disadvantage: it is slow to pass or costly to enforce [1]. [5] Examiner insight: Part (b) is stronger when it uses your own percentages from part (a). Quote both figures rather than saying “small firms are poorer”.

11. Rate falls, so borrowing is cheaper [1]. Households have lower payments and firms find investment more worthwhile [1]. Consumption and investment rise [1]. Aggregate demand rises [1]. Firms produce more and take on workers, so unemployment falls [1]. If the economy is near full capacity, firms cannot raise output and put up prices, so demand-pull inflation rises [1]. [6] Examiner insight: A chain scores when each step follows from the one before it. Writing “unemployment falls and inflation rises” without the steps tends to earn little.

12. Points that can earn credit, up to ten: Higher rates raise the cost of borrowing [1]. Consumption and investment fall [1]. AD falls, so the demand-pull part of inflation eases [1]. The currency may rise, making imported fuel cheaper in home currency [1], which helps with the cost-push part [1]. Inflation should therefore fall [1]. However, growth slows and unemployment may rise [1]. There are time lags before the full effect [1]. A rate rise does not lower the world price of fuel, so the cost-push part may remain [1]. Judgement: it is a useful tool for the spending part, but it works best alongside other policies, and the best response depends on which cause is larger [1]. [10] Examiner insight: To evaluate, weigh the policy against the specific causes in the question rather than writing about rate rises in general. Finish with a clear verdict that says what it depends on.

Where marks are usually lost

• Saying what a rate rise “does” without stating whether spending, AD or inflation goes up or down.
• Giving a calculation answer with no working or no time period.
• Reversing the exchange-rate conversion (multiplying where you should divide).
• Treating asset purchasing as a change in the interest rate.
• Using the headline fine instead of the expected fine.
• Listing advantages of a control with no disadvantage in an evaluation.
• Writing a long chain of reasoning with missing links.
• Finishing an evaluation with no verdict, or a verdict that ignores the data given.

Next steps

• Review the revision notes and re-read the study guide.
• Check your coverage on the printable checklist and the course hub.
• Take one of the free 10-minute diagnostics.
• Want live help? 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 2.1.2 Government policies, parts b) and d).