OCR A Level Economics: Fiscal policy 2: deficits, debt, stabilisers and rules (H460) – 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 the second half of Fiscal policy in the OCR A Level Economics (H460) specification, version 3.0 (June 2026), for first assessment in 2021. All countries and figures are invented. Teaching is in the study guide and revision notes. See also the OCR Economics hub, the checklist and the free 10-minute diagnostics.

Questions

1. Country B has tax revenue of 250 and government spending of 280, of which 18 is interest on debt. Opening debt is 700 and GDP is 1,000, rising to 1,040 by the end of the year.

(a) Explain how a budget deficit differs from the national debt. [2] (b) Calculate the deficit and the primary deficit. [2] (c) Calculate the closing debt and the closing debt-to-GDP ratio, to 1 decimal place. [3]

2. Explain two ways in which a government can finance a budget deficit. [4]

3. Country C leaks 0.15 of extra income into saving, 0.2 into tax and 0.15 into imports. Benefits rise by 0.04 for each unit of GDP lost. The government cuts spending by 15 to reduce its deficit. Calculate the multiplier, the fall in GDP, and the net reduction in the deficit. Comment on your result. [6]

4. In Country D the marginal propensity to save is 0.2 and the marginal propensity to import 0.2.

(a) Explain how automatic stabilisers reduce the effect of a boom. [3] (b) The marginal rate of tax is 0.3. An increase in investment raises aggregate demand by 14. Calculate the rise in GDP with and without the tax system. [4]

5. Country E raises capital spending by 16. The multiplier is 2.5. The extra borrowing raises the interest rate, which cuts private investment by 6.

(a) Calculate the rise in GDP if there is no crowding out. [2] (b) Calculate the rise in GDP with the crowding out. [2] (c) Calculate the share of the spending crowded out and give one reason why crowding out might be smaller. [2]

6. Explain how crowding in can occur as a result of fiscal policy. [4]

7. Country A has debt equal to 90% of GDP. The average interest rate is 3%, nominal growth is 4%, and the primary deficit is 1% of GDP. Use: new ratio = old ratio x (1 + r) / (1 + g) + primary deficit ratio.

(a) Calculate next year’s debt ratio to 1 decimal place. [3] (b) Calculate it if r rises to 5%. [2] (c) State the primary balance needed to keep the ratio at 90% when r is 5%. [1]

8. Country G has GDP of 2,000, revenue of 700, current spending of 690, capital spending of 90 and debt of 1,300. It has three rules: borrow only to invest; deficit no more than 3% of GDP; debt no more than 60% of GDP.

(a) Calculate the deficit and the deficit as a percentage of GDP. [2] (b) Assess whether each rule is met. [4]

9. Evaluate the effectiveness of fiscal rules. [8]

10. Evaluate the consequences of high government debt. [8]

11. Evaluate the effectiveness of fiscal policy in achieving a government’s macroeconomic objectives. [8]

Answers

1. (a) A deficit is the gap between spending and revenue during one year, a flow [1]; the national debt is the stock of borrowing built up and still owed [1]. (b) Deficit = 280 - 250 = 30 [1]; primary deficit = 30 - 18 = 12 [1]. (c) Closing debt = 700 + 30 = 730 [1]; ratio = 730 / 1,040 [1] = 70.2% [1]. Examiner insight: write the units and say whether you are giving a level or a ratio; the question mixes both, and a stated method keeps the working visible.

2. Selling bonds or bills to households, banks and overseas investors [1] adds to the debt and may push up interest rates because it competes for savings [1]. Borrowing from the central bank, which creates money [1], avoids pressure on interest rates but risks inflation if money grows faster than output [1]. (Selling state assets is an alternative method.) Examiner insight: name the method, then give a separate consequence; two methods without consequences leave each only half developed.

3. Leakages = 0.15 + 0.2 + 0.15 = 0.5, so the multiplier is 2 [1]. Fall in GDP = 15 x 2 = 30 [1]. Tax falls by 0.2 x 30 = 6 [1]. Benefits rise by 0.04 x 30 = 1.2 [1]. Net reduction = 15 - 6 - 1.2 = 7.8 [1]. This is 52% of the cut, so the saving is much smaller than planned and output falls by 30 [1]. Examiner insight: the comment should judge how large the shortfall is, not just restate the numbers.

4. (a) In a boom incomes rise [1]; progressive tax receipts rise faster than income and benefit payments fall [1]; this slows the growth of disposable income and consumption, reducing the boom, with no new government decision [1]. (b) Without tax: leakages 0.4, multiplier 2.5, so 14 x 2.5 = 35 [2]. With tax: leakages 0.7, multiplier 1.43, so 14 / 0.7 = 20 [2]. Examiner insight: the explanation should say why stabilisers are automatic; naming taxes and benefits alone is thin.

5. (a) 16 x 2.5 = 40 [2]. (b) Net injection = 16 - 6 = 10; 10 x 2.5 = 25 [2]. (c) 6 / 16 = 37.5% crowded out [1]. It is smaller with spare capacity, high saving or a central bank holding rates down (any one) [1]. Examiner insight: the crowding-out loss enters before the multiplier is applied; applying it afterwards gives a different answer.

6. Government spending raises demand and firms’ sales [1], so firms expect higher profit and become more confident [1]. The accelerator effect raises investment as firms add capacity [1]. Public infrastructure can raise the returns on private projects, so private spending rises alongside government spending [1]. Examiner insight: give a chain of cause and effect, and say how private spending rises; a bare statement that the economy improves is too general.

7. (a) 0.90 x 1.03 / 1.04 = 0.8913 [1]; add 0.01 gives 0.9013 [1]; 90.1% [1]. (b) 0.90 x 1.05 / 1.04 = 0.9087 [1]; add 0.01 gives 0.9187, so 91.9% [1]. (c) 0.90 - 0.9087 = -0.0087, so a primary surplus of about 0.9% of GDP [1]. Examiner insight: use the formula given, show the interest-growth term separately, and keep four decimal places until the end.

8. (a) Spending = 690 + 90 = 780; deficit = 780 - 700 = 80 [1]; 80 / 2,000 = 4.0% [1]. (b) Borrowing 80 is below capital spending 90, and the current budget is in surplus by 10, so the golden rule is met [1]. The 3% limit allows 60, so the deficit is 20 over and the rule is broken [1]. Debt is 1,300 / 2,000 = 65%, above 60%, so the ceiling is broken [1]. The golden rule is met but two rules fail, so rules can give conflicting signals [1]. Examiner insight: test each rule separately with its own number; one overall verdict hides which rules fail.

9. Points to develop: rules signal commitment and can lower the interest rate lenders charge [1]; they constrain governments that face short-term political pressure [1]; certainty about future taxes may support firms’ and households’ decisions [1]; they can be rigid, forcing cuts during a recession and deepening it [1]; escape clauses reduce credibility [1]; governments may use accounting tricks or cut capital spending, which is easiest to cut and harms growth [1]; effectiveness depends on enforcement and independent monitoring [1]; judgement: rules are effective when well designed, enforced and flexible over the cycle [1]. Examiner insight: advance both sides, then decide what effectiveness depends on; a one-sided list limits the evaluation.

10. Costs: interest payments have an opportunity cost [1]; future taxes may rise, so later generations pay [1]; borrowing may crowd out private investment [1]; lenders may lose confidence and demand higher yields [1]. Offsets: borrowing for capital spending can raise growth and revenue [1]; debt held domestically and in the home currency is easier to manage [1]; the ratio to GDP matters more than the level, and manageable if growth exceeds the interest rate [1]; judgement on which factors matter most for the country [1]. Examiner insight: qualify each cost with when it matters (a high ratio, rising yields, current spending) rather than listing them as certain.

11. For: raises or lowers aggregate demand directly [1]; a multiplier amplifies spending [1]; stabilisers act without delay [1]; spending can be targeted at sectors or regions [1]. Against: time lags in recognising, deciding and implementing [1]; crowding out and uncertainty over the multiplier [1]; high debt limits the room to act [1]; judgement: more effective with spare capacity and for demand-led problems, less so for supply-side problems [1]. Examiner insight: tie the judgement to a specific condition, such as spare capacity or the debt ratio.

Where marks are usually lost

• Confusing the deficit (flow) with the debt (stock).
• Applying the multiplier to a spending cut but ignoring the tax and benefit response.
• Dropping the units in a calculation or mixing a level with a ratio.
• Treating automatic stabilisers as a government decision.
• Stating that crowding out always happens.
• Listing the costs of debt with no judgement about how serious they are.
• Evaluating fiscal rules with a single sentence such as “they can be broken”.
• Leaving out the context, such as the stage of the cycle.

Next steps

• Review the revision notes and re-read the study guide.
• Open the OCR Economics hub and tick off the checklist.
• Try the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR A Level in Economics (H460) specification, version 3.0 (June 2026), for first assessment in 2021, published by OCR.