Cambridge A Level Economics: Macroeconomic objectives and fiscal policy (9708) – Revision Notes

These revision notes 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: policy objectives (5.1.1) and fiscal policy (5.2.1 to 5.2.7). This is AS Level content, assumed knowledge for A Level Papers 3 and 4. Full explanations are in the study guide, and you can test yourself with the practice questions. Use the course hub, the checklist and the diagnostics to plan revision. All figures are invented, in currency units (cu).

Key definitions

Term	Meaning
Price stability	Low, steady inflation
Government budget	Plan of revenue and spending for a period
Budget deficit	Spending greater than revenue
Budget surplus	Revenue greater than spending
National debt	Total owed by the government from past borrowing (a stock)
Direct tax	Paid directly to the government by the person or firm taxed
Indirect tax	Added to purchases and handed over by sellers
Progressive	Takes a higher proportion of income as income rises
Regressive	Takes a lower proportion as income rises
Proportional	Takes the same proportion at every income
Current spending	Used up in the year (wages, benefits, interest)
Capital spending	Adds lasting assets (roads, schools)
Expansionary fiscal policy	Higher spending or lower taxes to raise AD
Contractionary fiscal policy	Lower spending or higher taxes to cut AD

5.1.1 Objectives and fiscal tools

Objective	Problem	Fiscal response
Price stability	Demand-pull inflation	Contractionary
Low unemployment	Cyclical unemployment	Expansionary
Economic growth	Weak growth	Expansionary now; capital spending and incentives for capacity

Policy can be fiscal (this unit), monetary (section 5.3) or supply-side (section 5.4). Conflicts and trade-offs are not required in this unit.

Method: inflation, real growth, unemployment

1. Inflation = (new index − old index) ÷ old index × 100.
2. Real growth = (1 + nominal growth) ÷ (1 + inflation) − 1.
3. Unemployment rate = unemployed ÷ labour force × 100.

Worked reminder: CPI 120.0 to 123.6 gives 3.6 ÷ 120 × 100 = 3.0%. With 2.4 million unemployed in a labour force of 40 million, the rate is 6.0%.

5.2.1 to 5.2.3 Budget and national debt

• Balance = revenue − spending. A negative balance is a deficit and a positive balance is a surplus.
• Deficit is a flow per year. Debt is a stock of all past borrowing.
• Deficit or debt as a percentage of GDP is the usual size comparison.

Worked reminder: Country B’s budget

Revenue: income tax 200, corporation tax 60, sales tax 110, excise 30, total 400. Spending: current 372, capital 58, total 430.

Balance = 400 − 430 = −30, a deficit. With GDP of 1,250 the deficit is 30 ÷ 1,250 × 100 = 2.4%. Opening debt of 520 rises to 520 + 30 = 550, which is 44.0% of GDP. Income tax is 200 ÷ 400 = 50% of revenue. Capital spending is 58 ÷ 430 = 13.5% of the total.

Why the national debt matters

• Interest is an opportunity cost for spending elsewhere.
• Taxes may have to rise later, or spending fall.
• Foreign-held debt sends interest abroad.
• Very high debt can raise the interest lenders demand.
• The ratio to GDP shows how heavy the debt is relative to the economy.

Interest example: at an average rate of 4%, debt of 550 costs 0.04 × 550 = 22, which is 22 ÷ 400 = 5.5% of revenue.

5.2.4 Taxation

Method: average and marginal rates

1. Tax due = sum of (income in each band × that band’s rate).
2. Average rate = tax ÷ income × 100.
3. Marginal rate = rate on the next unit of income, or change in tax ÷ change in income.
4. If the average rate rises with income, the tax is progressive.

Worked reminder: Country B’s income tax

The first 12,000 is untaxed and income above that is taxed at 30%.

Income	Tax	Average rate
12,000	0	0%
20,000	2,400	12.0%
50,000	11,400	22.8%

At 50,000: 0.30 × 38,000 = 11,400. The marginal rate is 30% throughout, above the average rate. The average rate climbs with income, so the tax is progressive. A flat 25% would be proportional (5,000 on 20,000). A fixed charge of 200 would be regressive: 1.0% of 20,000 but 0.4% of 50,000.

Indirect taxes and income

A 10% tax on taxed goods hits two households. Household M has income 30,000 and spends 24,000 on taxed goods, so it pays 2,400, which is 8.0% of income. Household N has income 90,000 and spends 45,000 on them, so it pays 4,500, which is 5.0% of income. The rate is the same but the burden falls more heavily on the poorer household.

Reasons for taxation

• Raise revenue.
• Redistribute income.
• Discourage demerit goods and activities with negative externalities.
• Influence aggregate demand.

5.2.5 Government spending

• Current: day-to-day items. Capital: lasting assets.
• Reasons: provide public goods and merit goods, redistribute income, support growth, manage AD, correct market failure.
• Capital spending adds to demand now and may raise productive capacity later.

5.2.6 Expansionary and contractionary policy

	Expansionary	Contractionary
Spending	Up	Down
Taxes	Down	Up
AD	Shifts right	Shifts left
Budget	Deficit larger or surplus smaller	Deficit smaller or surplus larger
Suits	Cyclical unemployment, weak growth	Demand-pull inflation

5.2.7 AD/AS analysis

Method in steps

1. Draw the starting AD, SRAS and equilibrium (P, Y).
2. Decide which curve moves, and in which direction.
3. State the new equilibrium and compare with the old one.
4. Give effects on real output, the price level and employment.
5. Judge the size of the effect from the spare capacity.

Worked reminder: Country B

AD: Y = 1,000 − 5P and SRAS: Y = 400 + 5P. Equilibrium: 600 = 10P, so P = 60 and Y = 700.

Policy	AD becomes	P	Y	Price change	Output change
Spending +50	Y = 1,050 − 5P	65	725	+8.3%	+3.6%
Fiscal tightening of 40	Y = 960 − 5P	56	680	−6.7%	−2.9%

Check the first row: 1,050 − 400 = 650 = 10P, so P = 65 and Y = 400 + 325 = 725.

Chain: spending up, AD right, output and employment up, price level up. If SRAS is steep, more of the effect falls on prices.

Tax version of the chain: income tax cut, disposable income up, households spend part of the extra (the rest is saved), consumption up, AD right, output up. Because some of the cut is saved, the first-round shift in AD is smaller than for an equal rise in government spending.

Full employment version: if output cannot rise further because SRAS is vertical, a rightward shift in AD raises the price level and leaves real output unchanged.

Evaluation points

• Spare capacity decides how much is output and how much is price.
• Time lags in planning and spending.
• Leakages into saving and imports reduce the effect.
• Capital spending can raise supply in the long run.
• A larger deficit adds to the debt and later interest.

Must-know distinctions

• Deficit (flow) versus debt (stock).
• Direct versus indirect tax.
• Progressive, regressive and proportional.
• Average rate versus marginal rate.
• Current versus capital spending.
• Movement along a curve versus a shift of AD.

Quick self-test

1. Define a budget surplus.
2. Revenue is 520 and spending is 548. Find the balance.
3. Debt begins at 640 with a deficit of 28. Find the new debt.
4. Name one direct tax and one indirect tax.
5. Tax-free allowance 10,000, then 20%. Find the average rate at 30,000.
6. A fixed charge of 150 is paid by everyone. Is it progressive or regressive?
7. Give two reasons for government spending.
8. Which type of policy suits demand-pull inflation?
9. AD: Y = 900 − 4P and SRAS: Y = 300 + 4P. Find equilibrium.
10. Government spending rises by 40 in question 9. Find the new price and output.

Answers

1. Revenue is greater than spending.
2. 520 − 548 = −28, a deficit of 28.
3. 640 + 28 = 668.
4. For example income tax (direct) and a sales tax (indirect).
5. Tax = 0.20 × 20,000 = 4,000. Average rate = 4,000 ÷ 30,000 = 13.3%.
6. Regressive. It is a larger share of a low income than a high income.
7. For example provide public goods and redistribute income.
8. Contractionary.
9. 600 = 8P, so P = 75 and Y = 600.
10. AD: Y = 940 − 4P. 640 = 8P, so P = 80 and Y = 620.

Where marks are usually lost

• Writing “the government’s debt” for the deficit.
• Not showing that a progressive tax takes a rising proportion.
• Using the marginal rate in an average-rate calculation.
• Showing the wrong direction of the AD shift.
• Forgetting employment when the question asks for it.
• Giving a list of effects without a chain of reasoning.
• Evaluating without saying when the conclusion changes.
• Treating a tax cut and a spending rise of the same size as identical.

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.