Edexcel International Advanced Level Economics: Public expenditure and taxation (YEC11) – 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 follow the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (Issue 2, June 2018), section 4.3.5 items 1 and 2: public expenditure and taxation. Units 1 and 2 are the International AS content and Units 3 and 4 the extra International A2 content; Unit 4 is labelled an IAL compulsory unit. All countries and figures are invented for illustration.

Revise first with the study guide and revision notes. The course hub and checklist show where this topic fits.

Questions

1. (a) Classify each item as current expenditure, capital expenditure or a transfer payment: (i) wages of public school teachers, (ii) building a new railway line, (iii) housing benefit paid to low-income tenants. [3] (b) State whether income tax on wages and an excise duty on fuel are direct or indirect taxes. [2]

2. Country N spends 84bn on current items, 21bn on capital items and 45bn on transfer payments. GDP is 600bn. (a) Calculate public expenditure as a percentage of GDP. [2] (b) Calculate government spending (G) in the aggregate demand identity as a percentage of GDP. [2]

3. Country T has 5m people and GDP of 150bn. 20% are aged 65 or over and cost 12,000 each per year in pensions and care. 18% are under 15 and cost 6,000 each in schooling. (a) Calculate the age-related spending as a percentage of GDP. [3] (b) Later the shares become 26% aged 65 or over and 15% under 15. Costs per head and GDP are unchanged. Calculate the new percentage. [2] (c) Explain one change in the pattern of spending. [1]

4. Country V’s government spends an extra 30bn, financed by borrowing. The multiplier is 1.8. Private investment falls by 12bn. (a) Calculate the rise in output if there were no crowding out. [1] (b) Calculate the rise in output after crowding out. [2] (c) Explain why private investment falls. [3]

5. Country W has a tax-free allowance of 12,000 and charges 30% on income above it. (a) Find the tax paid, and the average rate of tax, for incomes of 20,000 and 80,000. [4] (b) Classify the tax and justify your answer. [2]

6. A worker earns 15 an hour for 36 hours a week. The marginal income tax rate rises from 25% to 35%. (a) Calculate the net hourly wage before and after the change. [2] (b) Calculate net weekly pay at 36 hours before and after. [2] (c) Calculate the hours needed to keep the original net pay, and explain the two effects on hours worked. [3]

7. The table shows the tax base at different income tax rates in Country Z (billions, invented).

Rate	10%	25%	40%	55%	70%
Base	1,000	900	760	580	360

(a) Calculate revenue at each rate. [2] (b) Calculate the change in revenue if the rate falls from 70% to 55%, and explain it. [2] (c) Explain why you cannot conclude that 55% maximises revenue. [2]

8. A government cuts income tax by 8bn. The marginal propensity to save is 0.10, to import 0.20 and to be taxed 0.20. (a) Calculate the rise in output. [3] (b) Calculate the induced rise in imports. [1] (c) Comment on the effect on the trade balance. [2]

9. A sales tax rises from 8% to 12%. Taxed goods make up 50% of the consumer price basket. Calculate the likely rise in the price level if the tax is fully passed on, and explain the aggregate supply effect. [4]

10. A firm can invest 150 in Country X (corporation tax 28%) or Country Y (18%). Pre-tax profit would be 20 in either. (a) Calculate the post-tax return in each country. [4] (b) Explain two other factors affecting the choice. [2]

11. Country R has a negative output gap. Evaluate whether its government should cut income tax rates to raise real output and employment. [10]

Answers

1. (a) (i) Current [1]. (ii) Capital [1]. (iii) Transfer payment [1]. (b) Income tax on wages is direct [1]; excise duty on fuel is indirect [1]. [5] Examiner insight: Classify by what the money does: a payment to a household that buys no output is a transfer, whoever receives it.

2. (a) Total = 84 + 21 + 45 = 150bn [1]. 150 / 600 = 25.0% [1]. (b) Exclude transfers: 84 + 21 = 105bn [1]. 105 / 600 = 17.5% [1]. [4] Examiner insight: Give the total before the percentage, and say why the second figure is lower, since transfers buy no output.

3. (a) Older: 1.0m × 12,000 = 12.0bn [1]. Children: 0.9m × 6,000 = 5.4bn [1]. Total 17.4bn, which is 17.4 / 150 = 11.6% of GDP [1]. (b) Older: 1.3m × 12,000 = 15.6bn; children: 0.75m × 6,000 = 4.5bn; total 20.1bn [1]. 20.1 / 150 = 13.4% [1]. (c) Spending shifts from education towards pensions and care as the population ages [1]. [6] Examiner insight: Convert the percentages into numbers of people first; slips tend to start there.

4. (a) 30 × 1.8 = 54bn [1]. (b) Net injection = 30 − 12 = 18bn [1]. Output rises by 18 × 1.8 = 32.4bn [1]. (c) Borrowing raises demand for a limited pool of savings [1]. Interest rates rise [1]. Borrowing costs more, so fewer investment projects offer an acceptable return [1]. [6] Examiner insight: Show each link in the chain from borrowing to the interest rate to investment; naming “crowding out” alone adds nothing.

5. (a) At 20,000: (20,000 − 12,000) × 30% = 2,400 [1]; average rate 2,400 / 20,000 = 12.0% [1]. At 80,000: 68,000 × 30% = 20,400 [1]; average rate 25.5% [1]. (b) Progressive, because the average rate rises with income [1], even though the marginal rate is constant at 30%, since the allowance has a smaller proportional effect as income rises [1]. [6] Examiner insight: Support the classification with average rates at two incomes; a high or flat marginal rate is not evidence by itself.

6. (a) 15 × 0.75 = 11.25 [1]; 15 × 0.65 = 9.75 [1]. (b) 36 × 11.25 = 405 [1]; 36 × 9.75 = 351 [1]. (c) 405 / 9.75 = 41.5 hours [1]. Working longer to keep take-home pay is the income effect [1]. The net wage falls 13.3%, so leisure is cheaper, and the substitution effect may lead her to work fewer hours [1]. [7] Examiner insight: Name both effects and say which direction each pulls; the overall result is uncertain without evidence.

7. (a) Revenue = rate × base [1]: 100, 225, 304, 319 and 252 [1]. (b) 319 − 252 = +67 [1]. The base grows enough to outweigh the lower rate, so the economy was past the peak [1]. (c) Only five rates are given, and the maximum could lie between 40% and 70% [1]. The true peak depends on avoidance, evasion and how people respond over time [1]. [6] Examiner insight: Reason from the data given and state what is not known; confident claims about the true peak are hard to support from five data points.

8. (a) Multiplier = 1 / (0.10 + 0.20 + 0.20) = 2 [1]. First-round spending = 8 × (1 − 0.10 − 0.20) = 5.6bn [1]. Output rises by 5.6 × 2 = 11.2bn [1]. (b) 0.20 × 11.2 = 2.24bn [1]. (c) Imports rise as income rises, so the trade balance worsens [1], unless lower business costs raise exports enough to offset it [1]. [6] Examiner insight: Apply the leakages to the first round before the multiplier, then carry the output figure into part (b).

9. Price of a taxed good: 100 → 108 → 112 [1]. Rise = 4 / 108 = 3.70% [1]. Across the basket: 3.70% × 0.5 = 1.85% [1]. The tax raises firms’ costs, so short-run aggregate supply shifts left and the price level rises [1]. [4] Examiner insight: Show the price of the taxed good first; then scale by the basket weight.

10. (a) Country X: 20 × 0.72 = 14.4; 14.4 / 150 = 9.6% [1][1]. Country Y: 20 × 0.82 = 16.4; 16.4 / 150 = 10.9% [1][1]. (b) Market size or skills of workers [1]. Quality of infrastructure or political stability [1]. [6] Examiner insight: Compare the two returns and state the gap (1.3 percentage points) before giving other factors.

11. Analysis: a tax cut raises disposable income [1]. Households spend part of it, so aggregate demand shifts right [1]. The multiplier raises income by more than the first round [1]. Output and employment rise when there is spare capacity [1]. Lower marginal rates may raise labour supply through the substitution effect [1]. Evaluation: part leaks into saving and imports, which weakens the effect [1]. With a negative output gap, extra demand raises output more than prices [1]. The cut lowers revenue and widens the deficit unless the economy is on the downward slope of the Laffer curve [1]. Judgement: a cut is likely to help if the gap is large and the cut is temporary and targeted at lower-income households who spend most of it [1]. The conclusion should depend on the size of the gap and the use of the lost revenue [1]. [10] Examiner insight: A judgement tends to gain credit when it names the conditions on which it depends, rather than repeating the earlier points.

Where marks are usually lost

• Including transfers in G, or leaving them out of total public expenditure.
• Calling a tax progressive without comparing average rates.
• Using the marginal rate where the average rate is needed.
• Describing only one of the two effects on work incentives.
• Applying the multiplier to the whole tax cut instead of the first-round spending.
• Treating the Laffer curve as showing where a real economy sits.
• Writing “crowding out” with no mechanism.
• Calling every tax cut inflationary without mentioning spare capacity.
• Leaving out a judgement in extended answers.

Next steps

• Re-read the study guide for any chain you missed.
• Use the revision notes for quick recall.
• Open the course hub and tick off the checklist.
• Try the free diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification, Issue 2, June 2018, Pearson Education Limited, section 4.3.5 items 1 and 2.