Cambridge O Level Economics: Government budget, spending and taxation (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 test the Cambridge O Level Economics 2281 syllabus for examination in 2026, statements 4.3.1 to 4.3.6: budget, spending, tax types, tax qualities and tax effects. All countries, firms and figures are invented and illustrative. Read the study guide first if a method is unfamiliar. The revision notes give quick recall. Course links: the Cambridge O Level Economics hub and the printable checklist. The free 10-minute diagnostics show where to start.

Questions

1. Define the government budget. [2]

2. Country B plans to spend 300 (billions of currency units) this year: welfare 78, health 66, education 54, other 48, transport 30 and defence 24.

(a) Calculate the share of the budget planned for health. [2] (b) The government moves 6 from other spending to education. Calculate education’s new share of the budget. [2] (c) Explain one reason why a government spends on health and one effect of that spending. [3]

3. Classify each tax as direct or indirect: (a) income tax, (b) corporation tax, (c) sales tax, (d) excise duty on fuel. [4]

4. In Country B the first 6,000 of income is untaxed, income from 6,000 to 24,000 is taxed at 25%, and income above 24,000 is taxed at 40%.

(a) Calculate the tax paid by a worker earning 12,000 and by a worker earning 50,000. [3] (b) Find each worker’s average rate of tax. [2] (c) State, with a reason, the type of tax shown. [1]

5. Country B charges every household the same refuse fee of 180 a year. Household M has an income of 3,600 and household N has an income of 18,000.

(a) Work out the fee as a percentage of each household’s income. [2] (b) State whether the fee is progressive, regressive or proportional. [1] (c) Explain one reason why this may be considered unfair. [1]

6. Country B proposes a tax of 50 on every adult, collected by post offices. Assess the proposal against two qualities of a good tax. [4]

7. In the market for school bags in Country B, Qd = 900 − 40P and Qs = −300 + 80P, where P is the price in currency units and Q is the number of bags.

(a) Calculate the price and quantity before any tax. [2] (b) A tax of 6 per bag is then imposed on sellers. Find the new equilibrium price and quantity. [3] (c) Work out how the tax revenue is shared between the burden on consumers and the burden on producers. [3]

8. Goods A and B each sell 600 units a week at a price of 20. Each is given a tax of 4 per unit, which is passed on in full to buyers. The price elasticity of demand is −0.75 for good A and −1.6 for good B.

(a) Calculate the percentage rise in the price of each good. [1] (b) Calculate the new quantity and tax revenue for good A. [2] (c) Calculate the new quantity and tax revenue for good B. [2] (d) Explain which good the government would prefer to tax to raise revenue. [2]

9. A firm earns a profit of 150,000 before tax. Corporation tax is 20%.

(a) Calculate the tax paid and the profit the firm keeps. [2] (b) Explain two ways a higher rate of corporation tax could affect producers or the wider economy. [4]

10. (a) State two reasons why governments levy taxes. [2] (b) Explain why a government might tax a demerit good. [3]

11. Country B plans to raise its sales tax from 4% to 9% and to cut its proportional income tax from 15% to 13%. Household L earns 14,000 and spends 9,000 on goods that carry the sales tax. Household H earns 70,000 and spends 21,000 on such goods. Assume neither changes its spending.

(a) Calculate the net change in tax paid by household L. [3] (b) Calculate the net change in tax paid by household H. [2] (c) Evaluate whether the reform is fair to low-income households. [5]

Answers

1. The government’s plan [1] of its expected spending and revenue over a period, usually a year [1]. [2] Examiner insight: A definition with only “spending” misses half the idea. Mention both spending and revenue and say that it is a plan.

2. (a) Share = 66 ÷ 300 × 100 [1] = 22% [1]. [2] (b) Education becomes 54 + 6 = 60 [1]. 60 ÷ 300 × 100 = 20% [1]. [2] (c) Health is a merit good, so people may use less than is best for society and the benefits spread to others [1]. A healthier workforce is more productive [1], but it costs more as the population ages, and the money has an opportunity cost in other areas [1]. [3] Examiner insight: Show the share formula before the number so your method is visible even if the arithmetic slips. In part (c), a reason and an effect are different things, so state both separately.

3. (a) Direct [1]; (b) direct [1]; (c) indirect [1]; (d) indirect [1]. [4] Examiner insight: Direct and indirect describes how a tax is collected. If you are unsure, ask whether the tax is on income or on spending.

4. (a) Worker on 12,000: (12,000 − 6,000) × 25% = 1,500 [1]. Worker on 50,000: 18,000 × 25% = 4,500 [1] plus 26,000 × 40% = 10,400, so total tax = 14,900 [1]. [3] (b) 1,500 ÷ 12,000 × 100 = 12.5% [1]. 14,900 ÷ 50,000 × 100 = 29.8% [1]. [2] (c) Progressive, because the average rate rises as income rises [1]. [1] Examiner insight: Apply each rate only to the slice of income in its band. Applying 40% to all 50,000 gives a wrong total and the later parts then use the wrong figure. Support “progressive” by quoting the two average rates.

5. (a) M: 180 ÷ 3,600 × 100 = 5% [1]. N: 180 ÷ 18,000 × 100 = 1% [1]. [2] (b) Regressive, because the average rate falls as income rises [1]. [1] (c) The poorer household gives up a bigger share of its income, so the burden does not match ability to pay [1]. [1] Examiner insight: Give the percentages before naming the type. A bare “regressive” is a claim, and the rates are the evidence.

6. Equity: every adult pays the same 50, which is a bigger share of a poor adult’s income, so it is not fair on ability to pay [1], and the tax is regressive [1]. Economy or certainty: one fixed amount is easy to understand and cheap to collect through existing post offices [1], so it scores well on certainty and economy, although fairness is weak [1]. [4] Examiner insight: Name each quality, then apply it to the facts given. A list of qualities with no link to the proposal is weak. A judgement on which quality matters most strengthens the answer.

7. (a) 900 − 40P = −300 + 80P, so 1,200 = 120P [1]. P = 10 and Q = 900 − 400 = 500 [1]. [2] (b) With the tax, sellers receive P − 6, so Qs = −300 + 80(P − 6) = −780 + 80P [1]. 900 − 40P = −780 + 80P gives 1,680 = 120P [1]. P = 14 and Q = 900 − 560 = 340 [1]. [3] (c) Revenue = 6 × 340 = 2,040 [1]. Consumers pay 14 − 10 = 4 more per bag, so they bear 4 × 340 = 1,360 [1]. Producers bear (6 − 4) × 340 = 2 × 340 = 680 [1]. The two add to 2,040. [3] Examiner insight: The tax shifts supply, so subtract 6 from P in the supply equation. Adding 6 to the supply price is a common slip. Check that the two shares add to total revenue.

8. (a) 4 ÷ 20 × 100 = 20% for both [1]. [1] (b) Good A: quantity falls by 0.75 × 20% = 15% [1]. New quantity 510, revenue 4 × 510 = 2,040 [1]. [2] (c) Good B: quantity falls by 1.6 × 20% = 32% [1]. New quantity 408, revenue 4 × 408 = 1,632 [1]. [2] (d) Good A, because demand is inelastic [1], so fewer buyers drop out in percentage terms, more units stay in the market and revenue is higher (2,040 against 1,632) [1]. [2] Examiner insight: Elasticity is applied to the percentage price change, not to the tax in currency units. In part (d), quote both revenue figures to support the comparison.

9. (a) Tax = 20% × 150,000 = 30,000 [1]. Profit kept = 120,000 [1]. [2] (b) Lower profit after tax leaves less to reinvest in machinery or new products [1], which may reduce future output and jobs [1]. Higher tax may also discourage new firms from starting, or move firms to places with lower tax [1], which reduces the tax base and local employment [1]. [4] Examiner insight: Each effect should be developed with a link to a consequence. “It reduces profit” is only the start, since the chain to investment and output makes the answer convincing.

10. (a) Any two of: raise revenue for spending; redistribute income; discourage demerit goods; protect domestic producers [1] [1]. [2] (b) A demerit good is overconsumed because users ignore harm to themselves and others [1]. The tax raises its price [1], so consumption falls, and the government also gains revenue [1]. [3] Examiner insight: Part (a) asks for two separate reasons. Two wordings of the same reason are really one reason. In part (b), say why the good is a demerit good before describing the tax.

11. (a) Extra sales tax = 5% × 9,000 = 450 [1]. Income tax saving = 2% × 14,000 = 280 [1]. Net = 450 − 280 = 170 more tax [1]. [3] (b) Extra sales tax = 5% × 21,000 = 1,050 [1]. Income tax saving = 2% × 70,000 = 1,400, so net change = 350 less tax [1]. [2] (c) For: household L pays 170 more while H pays 350 less, so the change makes the system more regressive, which is unfair on ability to pay [1]. Sales tax at 9% takes 810 ÷ 14,000 = 5.8% of L’s income against 1,890 ÷ 70,000 = 2.7% for H, a heavier burden on the poorer household [1]. Lower income tax may raise work incentives [1]. Against: higher sales tax may cut spending on harmful goods and is hard to avoid, so collection is cheap [1]. Judgement: the reform is unfair to low-income households, because the shift to indirect tax moves the burden toward them, unless the extra revenue is spent on support for them [1]. [5] Examiner insight: Bring the earlier results into the evaluation. A verdict needs a reason, and “it depends” is weak unless you say what the verdict turns on.

Where marks are usually lost

• Defining the budget as “the money a government has” instead of a plan of spending and revenue.
• Applying a tax rate to the whole income instead of the slice in each band.
• Naming a tax progressive on the strength of the money paid, with no comparison of average rates.
• Adding the tax to the supply price instead of replacing P with P − t in the supply equation.
• Not checking that the consumer and producer shares add to total revenue.
• Giving a reason for spending but no effect, or an effect with no reason.

Next steps

• Review with the revision notes.
• Re-read the study guide.
• See the Cambridge O Level Economics hub and the printable checklist.
• Take the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Aligned to the Cambridge O Level Economics 2281 syllabus for examination in 2026, published by Cambridge University Press and Assessment (Cambridge International), subject content statements 4.3.1 to 4.3.6.