OxfordAQA International AS and A-level Economics: Fiscal policy (9640) – 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.

This set covers fiscal policy, section 3.2.4.2 of the OxfordAQA International AS and A-level Economics specification (version 1.2, code 9640), with quantitative skills from section 3.5. Section 3.2 is International AS content. Every country and figure is made up for illustration. Prepare with the study guide and the revision notes, and see the hub and checklist.

Questions

1. Define fiscal policy. [2]

2. State whether each tax is direct or indirect: (a) income tax; (b) a 15% sales tax; (c) corporation tax; (d) an excise duty on petrol. [4]

3. In Country G nothing is paid on the first 15,000 of income, and 30% is paid on income above that.

(a) A person earns 30,000. Find the tax they pay and their average tax rate. [3] (b) A person earning 90,000 has an average rate of 25%. Using this and your answer to (a), identify the type of tax and give a reason. [2]

4. In Country H government spending is 760, tax revenue is 700 and GDP is 4,000. Opening national debt is 1,600.

(a) Find the budget balance and express it as a share of GDP. [2] (b) Calculate the national debt at the end of the year. [1] (c) GDP at the end of the year is 4,200. Calculate the debt as a percentage of GDP. [2]

5. In Country J potential GDP is 3,000 and actual GDP is 2,850. Tax revenue is 30% of GDP. At potential output government spending would be 930. At actual output it is 25 higher because of extra benefit payments.

(a) Find the output gap, as a percentage of potential GDP. [2] (b) Calculate the actual budget deficit. [3] (c) Calculate the structural deficit and the cyclical deficit. [2] (d) Explain why a return to potential output would not remove the deficit. [2]

6. In Country K the marginal propensity to save is 0.15, to tax 0.25 and to import 0.10. There is spare capacity.

(a) Calculate the multiplier. [2] (b) Government spending rises by 40. Calculate the maximum change in national income. [1] (c) Instead, taxes are cut by 40 and households spend 75% of it in the first round. Calculate the maximum change in national income. [2] (d) Explain why your answers to (b) and (c) differ. [2]

7. Explain how fiscal policy could be used to influence aggregate demand in a recession. [4]

8. Household L has income of 24,000 and spends 20,000. Household M has income of 100,000 and spends 45,000. All their spending bears a 25% sales tax that is included in the price.

(a) Calculate the sales tax each household pays, and show it as a percentage of income. [4] (b) State the type of tax this shows, and explain why. [2]

9. In a market for a good with an external cost, demand is Qd = 180 - 15P and supply is Qs = 30 + 15P, where P is the price and Q is the quantity.

(a) Find the market equilibrium price and quantity. [2] (b) A tax of 2 per unit is placed on sellers. Find the price buyers now pay and the new quantity. [3] (c) Work out the tax revenue and how much of it buyers and sellers each bear. [3] (d) The external cost is 2 per unit. Explain how the tax addresses the market failure. [2]

10. Analyse how government spending on vocational training could affect aggregate supply, and give one limit to the effect. [6]

11. A government faces high unemployment and a high national debt. Evaluate whether it should increase spending on public works, financed by borrowing. [10]

12. Government spending is 800 in year 1 and 840 in year 2. Prices, measured by an index, are 100 in year 1 and 102 in year 2.

(a) Calculate the percentage change in nominal spending. [1] (b) Calculate year 2 spending in year 1 prices. [1] (c) Calculate the percentage change in real spending. [1] (d) Comment on the difference between (a) and (c). [1]

Answers

1. The use of government spending and taxation (and the budget balance) [1] to influence aggregate demand or economic objectives [1]. [2] Examiner insight: A definition naming just one instrument, such as taxation, is incomplete. Cover both sides of the budget and the purpose.

2. (a) Direct [1]; (b) indirect [1]; (c) direct [1]; (d) indirect [1]. [4] Examiner insight: The test is whether the tax falls on income or wealth, or on spending. Write one word per item and avoid hedging.

3. (a) Taxable income = 30,000 - 15,000 = 15,000 [1]; tax = 30% x 15,000 = 4,500 [1]; average rate = 4,500 / 30,000 x 100 = 15% [1]. [3] (b) The average rate rises from 15% to 25% as income rises [1], so the tax is progressive [1]. [2] Examiner insight: Support the type of tax with the average rates. Saying more tax is paid by the richer person does not show it is progressive, since a regressive tax can also raise more from them.

4. (a) Balance = 700 - 760 = -60, a deficit of 60 [1]; 60 / 4,000 x 100 = 1.5% of GDP [1]. [2] (b) 1,600 + 60 = 1,660 [1]. [1] (c) 1,660 / 4,200 x 100 [1] = 39.5% [1]. [2] Examiner insight: State whether the balance is a deficit or a surplus, not just the number. Debt as a percentage of GDP should use the end-of-year GDP when the question gives it.

5. (a) (2,850 - 3,000) / 3,000 x 100 [1] = -5% [1]. [2] (b) Revenue = 30% x 2,850 = 855 [1]; spending = 930 + 25 = 955 [1]; deficit = 955 - 855 = 100 [1]. [3] (c) At potential output revenue = 30% x 3,000 = 900, so the structural deficit = 930 - 900 = 30 [1]; cyclical deficit = 100 - 30 = 70 [1]. [2] (d) The 30 structural deficit exists even at potential output [1], so it needs a tax rise or spending cut to remove it [1]. [2] Examiner insight: Build the answer in order: gap, actual balance, then the split. Check that the structural and cyclical parts add back to the actual deficit.

6. (a) MPW = 0.15 + 0.25 + 0.10 = 0.5 [1]; multiplier = 1 / 0.5 = 2 [1]. [2] (b) 40 x 2 = 80 [1]. [1] (c) First-round injection = 40 x 0.75 = 30 [1]; 30 x 2 = 60 [1]. [2] (d) Part of the tax cut is saved, so the first-round injection is smaller than 40 [1]; all government spending is injected in the first round, so the final effect is larger [1]. [2] Examiner insight: In (c), apply the multiplier to the amount spent in the first round, not to the whole tax cut. State that spare capacity is assumed.

7. Government raises spending or cuts taxes [1]; spending is a direct part of AD, and a tax cut raises disposable income and so consumption [1]; AD shifts right [1]; output and employment rise by more than the first change, through the multiplier, because there is spare capacity [1]. [4] Examiner insight: Strong answers link each step in a chain rather than listing instruments. A tax cut and a spending rise reach AD by different routes, so say which one you are using.

8. (a) Tax is 0.25 / 1.25 = 20% of spending [1]. L: 20% x 20,000 = 4,000, which is 4,000 / 24,000 x 100 = 16.7% of income [1]. M: 20% x 45,000 = 9,000 [1], which is 9,000 / 100,000 x 100 = 9.0% of income [1]. [4] (b) It is regressive [1] because the share of income taken falls as income rises, since the lower-income household spends a higher proportion of its income [1]. [2] Examiner insight: Because the tax is included in the price, one fifth of spending is tax, not a quarter. Using 25% of spending is a common slip.

9. (a) 180 - 15P = 30 + 15P gives 30P = 150, so P = 5 [1]; Q = 180 - 75 = 105 [1]. [2] (b) Supply becomes Qs = 30 + 15(P - 2) [1]; 180 - 15P = 15P gives P = 6 [1]; Q = 180 - 90 = 90 [1]. [3] (c) Revenue = 2 x 90 = 180 [1]; buyers pay 1 more per unit, so 1 x 90 = 90 [1]; sellers receive 4 instead of 5, so they bear 90 [1]. [3] (d) The tax raises the cost of the good to cover the external cost of 2 [1], so output falls from 105 towards the socially efficient level [1]. [2] Examiner insight: Check the new price in both equations, and link the tax to the externality in words.

10. Spending on training raises workers’ skills [1]; labour productivity rises [1]; unit costs fall, so short-run aggregate supply shifts right [1]; the quantity and quality of labour rise, so potential output grows and long-run aggregate supply shifts right [1]. Limit: it takes years before trained workers affect output [1], so the gain is delayed and the money has an opportunity cost [1]. [6] Examiner insight: Show the route from spending to productivity to costs to the AS curve. A limit scores only if you say why it weakens the effect.

11. Extra spending raises G and shifts AD right [1]; the multiplier magnifies the initial rise [1]; with high unemployment there is spare capacity, so output and jobs rise with little inflation [1]; higher incomes raise tax revenue and cut benefits, so part of the extra deficit is recovered [1]; if the works are infrastructure, LRAS rises as well [1]. Against: borrowing adds to the debt [1]; the debt ratio may still fall if GDP grows faster than debt [1]; interest payments are an opportunity cost, and lenders may lose confidence [1]; lags may mean the economy recovers first [1]. Judgement: the case is strong when the output gap is large and the structural deficit is small, since most of the borrowing is then cyclical [1]. [10] Examiner insight: Reach a judgement and say what it depends on. A list of costs and benefits with no conclusion leaves the evaluation unfinished.

12. (a) (840 - 800) / 800 x 100 = 5.0% [1]. [1] (b) 840 / 102 x 100 = 823.5 [1]. [1] (c) (823.5 - 800) / 800 x 100 = 2.9% [1]. [1] (d) Real growth is lower than nominal growth because prices rose, so the extra spending buys fewer goods and services than the nominal rise suggests [1]. [1] Examiner insight: Deflate by dividing by the index and multiplying by 100, then compare with the base year. State which prices the result is in.

Where marks are usually lost

• Giving a fiscal policy definition that covers taxation or spending but not both.
• Calling a tax progressive without checking that the average rate rises.
• Giving a deficit without its sign, or without the unit when asked for a percentage of GDP.
• Mixing up deficit and debt.
• Multiplying the full tax cut, not only the share spent in the first round.
• Treating the multiplier as certain, without saying spare capacity is assumed.
• Dividing by the wrong total when finding tax included in a price.
• Ignoring the starting position of the economy when judging a stimulus.
• Ending an evaluation without a conclusion.

Next steps

• Go back over weak points in the revision notes and the study guide.
• Tick off what you can do on the checklist; the course hub lists related pages.
• Try all the free 10-minute diagnostics.
• Book a free trial class: trial.

Official syllabus

Source: OxfordAQA, International AS and A-level Economics (9640), specification version 1.2, for International AS exams from May/June 2021 onwards and International A-level exams from May/June 2022 onwards. These questions cover section 3.2.4.2.