OCR GCSE Economics: Fiscal policy, government budgets and monetary policy (J205) – 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 sections 3.5 (Fiscal policy) and 3.6 (Monetary policy) of the OCR GCSE (9-1) Economics (J205) specification, Version 2.0 (June 2026). The course is not tiered. All data are invented: Island C, Country D and the markets are fictional, and “cu” means currency units.

Links: study guide | revision notes | OCR GCSE Economics hub | printable checklist | free 10-minute diagnostics

Questions

1. State whether each tax is direct or indirect: (i) a tax on a firm’s profits, (ii) a duty charged on each litre of fuel, (iii) national insurance contributions. [3]

2. Island C’s government plans these figures for one year (billions of cu).

Spending	cu	Revenue	cu
Health	50	Income tax	64
Education	36	National insurance	30
Pensions and benefits	52	VAT	41
Transport	16	Excise duties	14
Debt interest	9	Corporation tax	16
Other	15	Other	5

(a) Calculate the budget balance and state whether it is a surplus or a deficit. [2] (b) Calculate the percentage of revenue from indirect taxes, to 1 decimal place. [2]

3. Island C has an income tax of 0% on the first 10,000 cu, 25% on income from 10,000 to 30,000 cu and 45% on income above 30,000 cu. (a) Calculate the tax paid and the average tax rate (to 1 decimal place) for someone earning 42,000 cu. [3] (b) Show that the tax is progressive by comparing with someone earning 20,000 cu. [2]

4. In a fictional market for headphones, price is in cu.

Price	Quantity demanded	Quantity supplied	Quantity supplied if a 5 cu tax is added
10	400	400	100
11	360	460	160
12	320	520	220
13	280	580	280
14	240	640	340

(a) State the equilibrium price and quantity before the tax. [1] (b) After a 5 cu tax on each unit, state what buyers now pay and how many are bought. [2] (c) Calculate the government’s tax revenue and the amount of it that falls on buyers. [2]

5. Country D’s government spends 120 million cu on a rail link. Households re-spend 75% of any extra income. Calculate the total rise in income. [3]

6. During a recession Country D borrows 60 million cu to build a motorway. (a) Explain what is meant by the opportunity cost of this decision. [2] (b) Give one benefit and one cost of using borrowing to fund it. [2]

7. Analyse how a cut in income tax could raise economic growth and reduce unemployment. [6]

8. Evaluate whether progressive taxes are the best way to redistribute income. [8]

9. A central bank raises its interest rate. (a) Explain what is meant by monetary policy. [2] (b) An interest-only mortgage of 200,000 cu rises from 3% to 5%. Calculate the extra interest paid in a year. [3] (c) A saver earns 2.5% while inflation is 1.5%. Calculate the approximate real rate of return. [2]

10. Analyse how a rise in interest rates could affect price stability and economic growth. [6]

11. Evaluate the effects of a cut in interest rates on consumers and businesses. [8]

Answers

1. (i) Direct, because it is paid directly from profit [1]. (ii) Indirect, because it is added to the price of a good [1]. (iii) Direct, because it is paid from earnings [1]. [3] Examiner insight: Give a one-word classification for each part. A short reason helps to avoid confusing the type of tax with who finally pays it.

2. (a) Spending = 50 + 36 + 52 + 16 + 9 + 15 = 178 [1]. Revenue = 64 + 30 + 41 + 14 + 16 + 5 = 170, so the balance is 170 − 178 = −8, a deficit of 8 billion cu [1]. (b) Indirect taxes = 41 + 14 = 55 [1]. 55 ÷ 170 × 100 = 32.4% [1]. Examiner insight: Say whether it is a surplus or deficit as well as giving the number, and use the correct taxes. National insurance and corporation tax are not in the indirect total.

3. (a) Income in the 25% band = 30,000 − 10,000 = 20,000, so tax = 5,000 [1]. Income in the 45% band = 42,000 − 30,000 = 12,000, so tax = 5,400 [1]. Total = 10,400 cu, and 10,400 ÷ 42,000 × 100 = 24.8% [1]. (b) On 20,000 cu: (20,000 − 10,000) × 0.25 = 2,500 cu, which is 12.5% [1]. The average rate rises from 12.5% to 24.8% as income rises, so the tax is progressive [1]. Examiner insight: Show the tax band by band. Applying 45% to the whole income is the usual error, and a progressive claim needs average rates compared.

4. (a) Demand equals supply at price 10 cu and quantity 400 [1]. (b) With the tax, demand equals the new supply at price 13 [1] and quantity 280, so buyers pay 13 cu and buy 280 [1]. (c) Revenue = 5 × 280 = 1,400 cu [1]. Buyers pay 3 cu more per unit, so their share = 3 × 280 = 840 cu [1]. Examiner insight: Use the new quantity (280), not the old one, for revenue. Sellers keep 13 − 5 = 8 cu, so their share is 560 cu.

5. Multiplier = 1 ÷ (1 − 0.75) = 1 ÷ 0.25 = 4 [1]. Total rise = 120 × 4 [1] = 480 million cu [1]. Examiner insight: State the formula and substitute into it. Give units, and note that saving, taxes and imports would reduce the real effect.

6. (a) Opportunity cost is the next best alternative given up [1]. Here the 60 million cu cannot be spent on another use, such as hospitals or schools [1]. (b) Benefit: demand and jobs rise during the recession [1]. Cost: higher debt and interest payments in future [1]. Examiner insight: Link opportunity cost to the choice in the question. A generic definition on its own is thin.

7. Lower income tax raises disposable income [1]. Households can spend more, so consumption rises [1]. Aggregate demand rises [1]. Firms produce more, so output and growth increase [1]. They need more workers to meet demand [1], so unemployment falls [1]. [6] Examiner insight: Build a chain with each link causing the next. Mention of spare capacity or inflation is useful evaluation, but this command is “analyse”.

8. For: higher earners pay a higher average rate, so incomes after tax are more equal [1], and the revenue pays for benefits and services that help low earners [1]. Low-income households tend to spend a large share of extra income, which supports demand [1]. Against: very high rates may reduce effort or encourage avoidance [1], and skilled workers might move abroad [1]. Other methods such as benefits, free services or a minimum wage may target need more directly [1]. Judgement: progressive taxes are an effective part of redistribution at moderate rates, but they work best alongside spending, since too steep a rate may lower revenue [2]. [8] Examiner insight: A balanced answer ends with a supported judgement that says when the policy works best, not just “it depends”.

9. (a) Monetary policy is the use of interest rates (and the money supply) by the central bank [1] to influence spending, inflation and growth [1]. (b) 200,000 × 0.03 = 6,000 [1]. 200,000 × 0.05 = 10,000 [1]. Extra = 4,000 cu a year [1]. (c) Real rate is approximately 2.5 − 1.5 [1] = 1.0% [1]. Examiner insight: Show both interest figures before subtracting, and use the word “approximately” for the real rate.

10. Higher rates make borrowing dearer [1] and saving more rewarding [1]. Consumption and investment fall [1]. Aggregate demand falls [1], so price rises slow down and the economy moves towards price stability [1]. The cost is slower growth, as lower output may reduce jobs [1]. [6] Examiner insight: Cover both parts of the question. An answer on inflation alone leaves part of the question unanswered.

11. Consumers: borrowing is cheaper, so households with loans have lower repayments [1] and spend more [1]. Savers earn less, so those relying on interest lose income [1]. Businesses: borrowing costs fall, so more projects look profitable and investment rises [2]. Limits: the effect depends on confidence, since firms may not invest if sales look weak [1], and banks may not pass on the cut. Higher demand may also raise inflation [1]. Judgement: a cut helps borrowers and firms most, and is stronger when confidence is good and spare capacity exists [1]. [8] Examiner insight: Separate consumers from businesses and include both winners and losers. A one-sided answer can still be well developed, but it leaves out the evaluation.

Where marks are usually lost

• Using the old quantity instead of the new one to find tax revenue or subsidy cost.
• Charging the top tax rate on a whole income instead of the band only.
• Mixing up a deficit with the national debt.
• Stopping a chain at “spending rises” without reaching output, jobs or prices.
• Answering “evaluate” with a list of points and no judgement.
• Saying savers gain when rates fall.
• Forgetting units such as cu, million or per year.
• Giving a definition of opportunity cost without applying it.

Next steps

• Read the study guide and revision notes.
• Check progress against the checklist and the course hub.
• Take the free 10-minute diagnostics.
• Book a free trial class: trial classes.

Official syllabus

OCR GCSE (9-1) Economics (J205), Version 2.0 (June 2026), first assessment 2019, published by OCR. Sections 3.5 and 3.6.