O Level Economics: Government and the macroeconomy — Practice Questions (Cambridge 2281)

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 — Cambridge International holds copyright in its own papers. Use these alongside the official past papers available from your board.

Each question practises a skill tested in the June 2024 Paper 22. After each answer there is an examiner insight, a mark-scheme insight or a tip, and the real question to try next.

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Questions

1. A government changes the way it collects a tax on hotel stays. Hotels now pay the tax through a simple online form, so the cost of collecting the tax falls sharply. Every hotel is also sent a clear schedule setting out exactly how much is due and on which dates. Which two features of a good tax is the government aiming for? Name them. [2]

2. A government introduces two measures. Measure A is a free national website that lists every job vacancy and the skills each one requires. Measure B guarantees a public-sector job to anyone who has been out of work for more than eight years since the coal mines in their region closed.

(a) Explain which of the two measures is aimed at reducing frictional unemployment. (2 marks)

(b) Explain one other way a government could reduce frictional unemployment. (2 marks) [4]

3. In a country, the average money wage rose by 5% in Year 1 while the inflation rate was 3%. In Year 2, the average money wage rose by 2% while the inflation rate was 4%.

(a) State what happened to real wages in each year. (2 marks)

(b) A student writes: “Wages fell in Year 2.” Explain why the student is wrong. (1 mark)

(c) Explain one reason why a rise in wages may lead to a higher inflation rate. (2 marks) [5]

4. During a recession, a government usually collects less tax. Give two reasons for this. [2]

5. A country has an inflation rate of 11%, while its main trading partners have inflation rates of around 2%.

(a) Explain one way this high inflation rate could reduce the country’s economic growth. (2 marks)

(b) Explain how a country could have rapid inflation and still grow quickly. (2 marks) [4]

6. For each worker, identify the type of unemployment they are experiencing.

(a) A car-factory worker who loses her job because demand for cars falls across the whole economy during a recession. (1 mark)

(b) A graduate who has left university and is spending six weeks choosing between job offers. (1 mark)

(c) A textile worker who loses his job permanently because clothing production has moved to other countries, and whose skills do not match the jobs available locally. (1 mark) [3]

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Answers

1. It is economical — it costs much less to collect than it raises in revenue [1]. It is certain (clear to taxpayers) — hotels know exactly how much to pay and when [1]. Accept convenient instead of economical for the easy online payment. Naming the policy change itself (for example “made paying online”) is not a quality of a good tax.

Examiner insight (Cambridge 2281 June 2024 examiner report, Paper 22, Question 1(b)): Some candidates identified the changes the government made to its tax system, such as reducing the tax burden, instead of the qualities of a good tax. Answer with the quality (economical, certain, convenient, efficient, equitable), not the policy.

Source for the examiner insights on this page: Cambridge O Level Economics 2281 June 2024 Principal Examiner Report for Teachers, Paper 2281/22 section, paraphrased.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 1(b).

2. (a) Measure A is aimed at frictional unemployment — identification [1]. It gives workers and employers better information about vacancies, so people spend less time searching and move between jobs more quickly — explanation [1]. Measure B targets structural unemployment: people out of work for years after an industry closed are not “between jobs” temporarily.

(b) Identification [1], explanation [1], for example: not raising (or reducing) unemployment benefit in real terms [1], which increases the incentive to accept a job sooner [1]; or helping with the cost of moving to another area for a new job [1], which improves geographical mobility so vacancies are filled more quickly [1].

Examiner insight (Cambridge 2281 June 2024 examiner report, Paper 22, Question 1(d)): The key was to focus specifically on frictional unemployment, which is temporary. People who have been unemployed for a very long time are experiencing structural unemployment, so measures aimed at them did not answer the question.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 1(d).

3. (a) Year 1: real wages rose (by roughly 2%), because money wages grew faster than prices [1]. Year 2: real wages fell (by roughly 2%), because prices rose faster than money wages [1].

(b) The money wage still rose by 2% in Year 2; it just rose more slowly than in Year 1. A fall in the rate of increase is not a fall in the wage [1].

(c) Identification [1], explanation [1], for example: higher wages raise firms’ costs of production [1], so firms raise prices — cost-push inflation [1]; or higher wages raise disposable income and consumer spending [1], increasing total demand — demand-pull inflation [1].

Examiner insight (Cambridge 2281 June 2024 examiner report, Paper 22, Question 1(e)): This was a challenging question: the data showed the change in the average wage, which stayed positive (wages rose every year, at different rates). Strong answers interpreted the pattern and explored why wages and inflation move together; a small proportion simply wrote down the figures without any interpretation.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 1(e).

4. Any two [1] each, for example: incomes fall and unemployment rises, so less income tax is paid [1]; consumer spending falls, so less indirect tax (such as VAT/sales tax) is collected [1]; firms’ profits fall, so less corporation tax is paid [1]; fewer imports are bought, so less tariff revenue is raised [1].

Examiner insight (Cambridge 2281 June 2024 examiner report, Paper 22, Question 4(a)): Most candidates understood what a recession is, but some answered a different question by giving reasons why a government might choose to cut taxes during a recession. The question asks why revenue falls automatically.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 4(a).

5. (a) Identification [1], explanation [1], for example: the country’s products become less internationally competitive because prices are rising faster than abroad [1], so exports fall and imports rise, reducing total demand and real GDP growth [1]. Or: uncertainty about future prices discourages firms from investing [1], limiting growth in productive capacity [1].

(b) Identification [1], explanation [1], for example: if the inflation is demand-pull, it comes from rising total demand [1], which may encourage firms to raise output, so growth could be high [1]. Or: inflation reduces the real value of debts/the real cost of borrowing [1], which may encourage consumer spending and investment [1].

Examiner insight (Cambridge 2281 June 2024 examiner report, Paper 22, Question 3(d)): Good answers separated demand-pull from cost-push inflation, since they can have different effects on growth. Stronger answers also compared the country’s inflation rate with rivals’ and considered the effect of inflation on the real value of debt.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 3(d).

6. (a) Cyclical unemployment [1].

(b) Frictional unemployment [1].

(c) Structural unemployment [1].

Tip: Ask two questions: is the job loss caused by a fall in demand across the whole economy (cyclical), and is it temporary while someone moves between jobs (frictional)? If it is long-term and caused by a change in the structure of the economy that leaves skills mismatched, it is structural.

Try the real question next: Cambridge O Level Economics 2281, June 2024, Paper 22, Question 1(d).

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Where marks are usually lost

• Answering the policy instead of the concept: naming what a government did rather than the quality of a good tax or type of unemployment it targets.
• Treating long-term unemployment as frictional; frictional unemployment is short-term, between jobs.
• Confusing a slower rise with a fall — a wage growing by 2% instead of 5% is still rising.
• “Explain” questions with only an identification: each point needs a linked reason (identification [1], explanation [1]).
• Writing about why a government might cut taxes when the question asks why tax revenue falls.