What does the government policy and market failure module cover?

This module covers OCR J205 topics 2.6 to 2.9: fiscal policy (government spending and taxation), monetary policy (the central bank's use of interest rates), supply-side policy (raising productive capacity), the types of tax and areas of government spending, and market failure with its causes (externalities, merit and demerit goods, public goods) and the ways government can correct it.

What is the difference between fiscal and monetary policy?

Fiscal policy is the government's use of spending and taxation to influence the economy, run by the government. Monetary policy is the central bank's use of interest rates and the money supply, run independently by the Bank of England in the UK. Expansionary fiscal or monetary policy boosts demand to support growth and jobs; contractionary policy reduces demand to control inflation.

How do interest rates affect the economy in OCR GCSE Economics?

The interest rate is the cost of borrowing and the reward for saving. Raising rates makes borrowing dearer and saving more attractive, so households and firms spend and invest less, reducing demand and helping to cut inflation. Lowering rates does the reverse, boosting borrowing, spending and investment to support growth. You should be able to calculate the interest earned or paid when a rate changes.

What causes market failure and how is it corrected?

Market failure is when a free market allocates resources inefficiently. The main causes are externalities (costs or benefits to third parties), merit goods (under-consumed, like education), demerit goods (over-consumed, like tobacco), and public goods (non-excludable and non-rival, so under-provided). Governments correct it with indirect taxes, subsidies, regulation, information and direct provision.

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Government policy and market failure - OCR GCSE Economics (J205) module overview

An overview of the government policy module of OCR GCSE Economics (J205): fiscal policy, monetary policy and interest rates, supply-side policy, taxation and government spending, and market failure with its causes and remedies.

Generated by Claude Opus 4.810 min read2.6-2.9Updated 2026-06-02

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this module covers
The three policy tools at a glance
How it is assessed
How to revise this module
For the official specification

Government policy and market failure (OCR J205 topics 2.6 to 2.9) is where the macroeconomics component turns to what the government can actually do. It covers the three main policy tools and the reasons markets sometimes need correcting. It is examined in J205/02: National and international economics. This page maps the module and links to a focused answer for each dot point.

What this module covers

The module covers the government's toolkit and the case for using it.

Fiscal policy. Government spending and taxation, expansionary versus contractionary policy, and the effects on growth, employment and prices.
Monetary policy. The central bank's use of interest rates to affect saving, borrowing, spending and investment, and the effects on growth and inflation.
Supply-side policy. Measures (education, training, infrastructure, incentives) that raise productivity and long-run capacity.
Taxation and government spending. Direct versus indirect and progressive versus regressive taxes, the main areas of spending, and the purposes of taxation.
Market failure. Externalities, merit and demerit goods and public goods, and how the government corrects them.

The three policy tools at a glance

Tool	Who runs it	Main levers	Mainly affects
Fiscal policy	Government	Spending and taxation	Demand
Monetary policy	Central bank	Interest rates, money supply	Demand and inflation
Supply-side	Government	Education, infrastructure, incentives	Productive capacity

How it is assessed

This module is examined in J205/02: National and international economics, which is 1 hour 30 minutes, 80 marks and 50% of the GCSE. Expect multiple choice and interest-rate calculation questions, and longer Explain and Discuss questions on policy choices and market failure. A calculator is allowed.

How to revise this module

Separate the policy tools. Be clear which is fiscal (spending and tax), which is monetary (interest rates) and which is supply-side (capacity).
Trace the transmission. Practise the chains: lower rates raise spending and demand; an indirect tax cuts consumption of a demerit good.
Calculate interest. Work out the interest earned or paid when a rate changes.
Master market failure. Know externalities, merit and demerit goods, and public goods, and match each to the right government remedy.

For the official specification

OCR publishes the full specification (J205), past papers and mark schemes at ocr.org.uk. Always revise from the current specification and OCR's own past papers.

Sources & how we know this

OCR GCSE (9-1) Economics J205 specification — OCR (2017)