Pearson Edexcel International GCSE Economics: Fiscal policy, taxes and deficits (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 specification point 2.1.2 a), fiscal policy, from the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026 (Paper 2: Macroeconomics and the Global Economy). The specification has a single tier of entry. All countries and figures are invented and illustrative. Teaching pages: study guide and revision notes.

Questions

1. What is meant by fiscal policy? [2]

2. State one direct tax and one indirect tax. [2]

3. In Country E, income tax is 0% on the first 9,000 earned, 15% on income from 9,001 to 27,000 and 30% on income above 27,000. A worker earns 45,000 gross. Calculate the worker’s total income tax, net pay and average tax rate. Show your working. [4]

4. Country E also charges an 18% sales tax.

(a) A jacket has a pre-tax price of 150. Calculate the price the buyer pays. [2] (b) Explain why a sales tax may take a larger share of income from a low-income household than from a high-income household. [3]

5. Country A (illustrative) has GDP of 4,500 and the budget below (currency units, billions).

Revenue		Spending
Income tax	400	Healthcare	264
Corporation tax	156	Education	192
Sales tax and excise duties	440	Social protection	348
Other	60	Defence	84
		Infrastructure	120
		Debt interest	72
		Other	120

(a) Calculate the percentage of government spending that goes on healthcare. [2] (b) Work out the budget balance and say whether it is a deficit or a surplus. [2] (c) Calculate the balance as a percentage of GDP. Give your answer to one decimal place. [2] (d) Calculate debt interest as a percentage of government revenue. Give your answer to one decimal place. [2]

6. Explain one way a government could use a fiscal surplus. [3]

7. Explain one disadvantage of running a fiscal deficit year after year. [3]

8. Country F (illustrative) has high unemployment and unused capacity in its construction industry. Analyse how more government spending on roads could reduce unemployment. [6]

9. (a) Explain how income tax and benefit payments can together reduce the gap between rich and poor. [3] (b) Explain one way a government could use fiscal policy to protect the environment. [3]

10. Country G (illustrative) has GDP of 36,000 (millions). It cuts income tax so that 500,000 workers each gain 2,400 a year. Households spend 75% of any extra income, and 20% of that extra spending goes on imports.

(a) Calculate the total extra disposable income. [1] (b) Calculate the extra household spending. [1] (c) Calculate the spending that leaks to imports and the rise in domestic demand. [2] (d) Calculate the rise in domestic demand as a percentage of GDP. [1]

11. Country H has strong demand, prices rising quickly and low unemployment. Its government plans to cut spending and raise sales tax. Evaluate whether this contractionary fiscal policy is a good choice. [9]

Answers

1. The use of government spending and taxation [1] to influence the economy or achieve macroeconomic objectives [1]. [2] Examiner insight: Two parts are needed, so name the tools and say what they are used for. “Government policy” alone gives neither.

2. Direct: income tax or corporation tax [1]. Indirect: sales tax, VAT or excise duty [1]. [2] Examiner insight: Check each tax is in the right column. If you are unsure, pick the standard examples.

3. Band 9,001 to 27,000: 18,000 × 0.15 = 2,700 [1]. Above 27,000: 18,000 × 0.30 = 5,400 [1]. Total tax = 8,100; net pay = 45,000 − 8,100 = 36,900 [1]. Average rate = 8,100 ÷ 45,000 × 100 = 18.0% [1]. [4] Examiner insight: The command word says calculators may be used and workings should be given. Show the tax for each band so that a slip in one step is easy to see.

4. (a) Tax = 150 × 0.18 = 27 [1]. Price = 177 [1]. [2] (b) Low-income households spend most or all of their income [1]. So a larger proportion of their income goes on taxed goods [1]. Richer households save more, so the same tax rate takes a smaller share of their income [1]. [3] Examiner insight: A strong answer states a fact and then expands it twice, here saving and share of income. Say “share of income”, not just “pays more”.

5. (a) Total spending = 264 + 192 + 348 + 84 + 120 + 72 + 120 = 1,200. 264 ÷ 1,200 × 100 [1] = 22.0% [1]. [2] (b) Revenue = 400 + 156 + 440 + 60 = 1,056. Spending − revenue = 1,200 − 1,056 = 144 [1]. Spending exceeds revenue, so it is a deficit of 144 [1]. [2] (c) 144 ÷ 4,500 × 100 [1] = 3.2% of GDP [1]. [2] (d) 72 ÷ 1,056 × 100 [1] = 6.8% [1]. [2] Examiner insight: Add the columns first and write the totals down. Choose the right denominator (spending, GDP or revenue) for each part.

6. The government could use the surplus to repay some national debt [1]. This lowers future debt interest payments [1]. That frees revenue for spending on services such as health or education [1]. [3] Examiner insight: Pick one use and develop it. Developing one use fully is better than listing three without explanation.

7. Each deficit is financed by borrowing, which adds to the national debt [1]. Debt interest then rises and takes a larger share of revenue each year [1]. Less revenue is left for health, education or tax cuts, or taxes must rise later [1]. [3] Examiner insight: Separate the deficit (one year) from the debt (the total). Mixing them up weakens the chain.

8. Spending on roads gives contracts to construction firms [1]. Firms have unused capacity, so they can start work quickly and need more workers [1]. Hiring from the unemployed lowers unemployment directly [1]. The new workers earn wages and spend them in shops and other businesses [1]. This extra demand leads those firms to hire more staff [1]. Better roads may also cut transport costs, which helps firms expand later [1]. [6] Examiner insight: Use the context given: spare capacity in construction is why the effect should be quick. Each link should lead to the next, and end on the objective named in the question.

9. (a) A progressive income tax takes a higher percentage from high earners [1]. The revenue is used to pay benefits and fund free public services for low-income households [1]. So post-tax and benefit incomes are more equal than market incomes [1]. [3] (b) A tax on polluting goods or fuel raises their price [1]. Consumers and firms buy less of them [1]. Alternatively, the government can spend on public transport or clean energy, which gives greener choices [1]. [3] Examiner insight: For environmental answers, state the fiscal tool (tax or spending) before the effect.

10. (a) 500,000 × 2,400 = 1,200 million [1]. [1] (b) 1,200 × 0.75 = 900 million [1]. [1] (c) Imports: 900 × 0.20 = 180 million [1]. Domestic demand rise = 900 − 180 = 720 million [1]. [2] (d) 720 ÷ 36,000 × 100 = 2.0% [1]. [1] Examiner insight: Carry the units (millions) through, and use the previous line’s figure so each step is clear. The leakage to imports also links to the current account.

11. An indicative answer: Case for: lower government spending and a higher sales tax cut total demand [1]. When demand is strong, falling demand takes pressure off prices, so inflation slows [1]. Spending less and taxing more narrows any deficit, reducing future debt interest [1]. Case against: lower demand means firms sell less and may cut output and jobs, so unemployment rises from its low level [1]. Slower growth is a cost if the economy was doing well [1]. A sales tax raises prices directly in the short term and hits low-income households hardest [1]. Cuts to health or education may harm long-run output [1]. Judgement: it depends on how fast prices are rising and how much slack there is [1]. If inflation is high and persistent, a measured contractionary policy is justified, but spreading tax rises and cuts carefully limits the damage to the poor and to public services, and the time lag means the effect may arrive late [1]. [9] Examiner insight: An evaluate answer needs a supported conclusion. Use Country H’s facts, give a reasoned judgement, and say what would change it.

Where marks are usually lost

• Defining fiscal policy with only the tools or only the aim.
• Calling a sales tax a direct tax, or income tax an indirect tax.
• Not showing the working for each tax band.
• Using the wrong base in a percentage, for example dividing by spending when the question asks about GDP.
• Mixing up the deficit and the national debt.
• Stopping an analysis chain before it reaches the objective.
• Writing generic points that ignore the country or situation in the question.
• Giving an evaluation with no conclusion, or one that does not follow from the points.

Next steps

• Re-read the study guide and the revision notes.
• Visit the Edexcel IGCSE Economics hub and tick off the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1), specification Issue 3, February 2026, published by Pearson Education Limited, section 2.1.2 a).