Cambridge A Level Economics: Macroeconomic objectives and fiscal policy (9708) – 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 5.1 and 5.2 of the Cambridge International AS and A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028. This is AS Level content, assumed knowledge for A Level Papers 3 and 4. Country C and all figures are invented, in currency units (cu). Read the study guide and the revision notes first. The course hub, the checklist and the diagnostics show the rest of the syllabus.

Questions

1. Define the national debt. [2]

2. Country C’s government plans revenue of 220 from income tax, 180 from sales tax and 140 from other sources, and spending of 470 on current items and 95 on capital items (cu billion).

(a) Find the budget balance and say whether it is in deficit or surplus. [2] (b) The debt was 800 at the start of the year. Calculate the debt at the end. [1] (c) GDP is 2,500. Calculate the end-of-year debt as a percentage of GDP. [1]

3. State whether each is a direct or an indirect tax: (i) tax on wages; (ii) a tax per litre of petrol; (iii) tax on company profits. [3]

4. Country C’s income tax: the first 15,000 is untaxed; income from 15,000 to 45,000 is taxed at 25%; income above 45,000 is taxed at 35%.

(a) Calculate the tax paid on an income of 70,000. [2] (b) Calculate the average rate of tax. [1] (c) State the marginal rate of tax at this income. [1] (d) Explain why the tax is progressive. [2]

5. Every adult pays a fixed charge of 300 a year. Calculate the charge as a percentage of income for an adult earning 15,000 and one earning 60,000, and state the type of tax. [3]

6. (a) Classify as current or capital spending: (i) teachers’ salaries; (ii) a new bridge. [2] (b) Explain one reason why a government may increase capital spending. [2]

7. Explain two reasons why a government taxes its citizens. [4]

8. Distinguish between expansionary and contractionary fiscal policy. [3]

9. In Country C, AD is Y = 2,400 − 8P and SRAS is Y = 800 + 8P, where Y is real output in cu billion and P is the price level. Each worker produces 20,000 cu a year.

(a) Calculate equilibrium P and Y. [2] (b) The government cuts spending by 160. Calculate the new equilibrium. [2] (c) Find the percentage change in the price level and in real output. [1] (d) Calculate the change in employment, in millions. [2]

10. The consumer price index rises from 108.0 to 110.7 and nominal GDP grows by 5.6%.

(a) Calculate the rate of inflation. [2] (b) Calculate the rate of real growth. [2] (c) The target is 2% and the cause is rising demand. State one fiscal policy response. [1]

11. Evaluate whether expansionary fiscal policy is the best response to cyclical unemployment in Country C. [8]

Answers

1. The total amount the government owes [1], built up from past borrowing (accumulated deficits) [1]. [2] Examiner insight: “money the government owes” can be too thin; stating that it accumulates from past deficits shows you can separate debt from deficit.

2. (a) Revenue = 220 + 180 + 140 = 540 and spending = 470 + 95 = 565 [1]. Balance = 540 − 565 = −25, a deficit [1]. (b) 800 + 25 = 825 [1]. (c) 825 ÷ 2,500 × 100 = 33.0% [1]. Examiner insight: write the sign or the word deficit, since a bare 25 does not say which side is larger.

3. (i) Direct [1]; (ii) indirect [1]; (iii) direct [1]. Examiner insight: decide by who pays the government, not by who bears the cost in the end.

4. (a) 0.25 × 30,000 = 7,500 [1]; 0.35 × 25,000 = 8,750, so total tax = 16,250 [1]. (b) 16,250 ÷ 70,000 × 100 = 23.2% [1]. (c) 35% [1]. (d) At 45,000 the average rate is 7,500 ÷ 45,000 = 16.7%, rising to 23.2% at 70,000 [1]. A higher proportion of income is taken as income rises, so the tax is progressive [1]. Examiner insight: keep average and marginal rates apart; the marginal rate is the band rate, not the total divided by income.

5. 300 ÷ 15,000 × 100 = 2.0% [1]; 300 ÷ 60,000 × 100 = 0.5% [1]. The proportion falls as income rises, so it is regressive [1]. Examiner insight: a regressive tax is defined by the falling share of income, not by the amount, which here is equal.

6. (a) (i) Current [1]; (ii) capital [1]. (b) It builds lasting assets such as roads or schools [1], which raise productive capacity so that long-run output can rise (or provide services that markets under-provide) [1]. Examiner insight: a developed reason links the spending to a benefit; naming only an example earns less than explaining what it achieves.

7. Any two reasons, each with a development, for example: raise revenue to fund public spending [1], so services can be provided without extra borrowing [1]; redistribute income by taxing high incomes at higher rates [1], narrowing inequality [1]. Other valid reasons: discourage demerit goods by raising their price, or reduce AD to slow demand-pull inflation. [4] Examiner insight: two different reasons are needed; two examples of raising money count as one reason.

8. Expansionary policy raises AD [1] through higher government spending or lower taxes [1]. Contractionary policy reduces AD through lower spending or higher taxes [1]. [3] Examiner insight: name the direction of AD and the budget tools; saying only “expansionary means spending more” omits taxes.

9. (a) 2,400 − 8P = 800 + 8P, so 1,600 = 16P [1]; P = 100, Y = 1,600 [1]. (b) AD becomes Y = 2,240 − 8P [1]; 1,440 = 16P, so P = 90 and Y = 1,520 [1]. (c) Price level −10%, real output −5.0% [1]. (d) Employment = Y ÷ 20, so 1,600 ÷ 20 = 80 and 1,520 ÷ 20 = 76 [1]; a fall of 4 million [1]. Examiner insight: show the new AD equation before solving, and state the direction of each change in your conclusion.

10. (a) (110.7 − 108.0) ÷ 108.0 × 100 [1] = 2.5% [1]. (b) 1.056 ÷ 1.025 − 1 [1] = 3.0% [1]. (c) Contractionary policy, such as cutting government spending or raising taxes [1]. Examiner insight: subtracting 2.5 from 5.6 gives only an approximation; dividing by the price index is the accurate method.

11. Chain: the government raises spending or cuts taxes [1]; AD shifts right [1]; with spare capacity firms raise output and employment, and the price level rises slightly [1]; higher incomes raise tax receipts, offsetting part of the larger deficit [1]. Evaluation: the policy works best with plenty of spare capacity, since nearer full employment more of the effect is a higher price level [1]; time lags in planning spending, and leakages into saving and imports, weaken the effect [1]; a larger deficit adds to the national debt and later interest [1]. Judgement: it suits cyclical unemployment, but not structural unemployment, where supply-side measures are more suitable [1]. [8] Examiner insight: an evaluation gains from stating when the conclusion changes (spare capacity, type of unemployment), not from a list of drawbacks.

Where marks are usually lost

• Mixing up the budget deficit (a flow) and the national debt (a stock).
• Giving the amount of tax instead of the proportion when asked about progressive or regressive taxes.
• Using the marginal rate when asked for the average rate, or the reverse.
• Classifying a tax by who bears the burden instead of who pays the government.
• Showing the AD shift in the wrong direction after a spending cut.
• Leaving out employment when the question names it.
• Describing inflation or growth calculations with the approximation instead of dividing.
• Listing evaluation points without a final judgement.

Next steps

• Review the revision notes and the study guide.
• Go to the course hub and the checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International, Cambridge International AS & A Level Economics (9708) syllabus for examination in 2026, 2027 and 2028, Subject content, section 5 Government macroeconomic intervention (AS Level), sections 5.1 and 5.2.