A-level Economics Year 12 · Topic 2

Macroeconomics

Macroeconomics studies the economy as a whole: growth, jobs, prices and trade.

We will learn how economic performance is measured, including GDP, inflation, unemployment, the balance of payments and inequality.

We will also introduce aggregate demand and supply, and the main policies the government uses to manage the economy.

8 subtopics
285 questions
Free: 2.1 notes and 6 questions

In this topic

2.1Measuring performance and AD/ASFree below · 13 questions
2.2Economic policyOpen in Full Marks · 11 questions
2.3Macroeconomic objectives and indicators of economic performanceOpen in Full Marks · 58 questions
2.4Measuring economic growth: GDP, GNI, real vs nominal, per capita and PPPOpen in Full Marks · 28 questions
2.5Measuring inflation: CPI, RPI, price indices, weights and limitationsOpen in Full Marks · 53 questions
2.6Measuring employment and unemployment: claimant count, Labour Force Survey and inactivityOpen in Full Marks · 60 questions
2.7The balance of payments and the current accountOpen in Full Marks · 29 questions
2.8Measuring income and wealth distribution: Lorenz curve, Gini coefficient and povertyOpen in Full Marks · 33 questions

2.1 · Free notes

Measuring performance and AD/AS

Key points

Key indicators: real GDP and GDP per capita, inflation (CPI), unemployment, the balance of payments on the current account, and measures of inequality and wellbeing.
Aggregate demand = C + I + G + (X − M); the AD curve slopes downwards.
Aggregate supply: short-run AS shifts with costs; long-run AS reflects productive capacity, shifted by investment, technology, skills and migration.
Macroeconomic equilibrium occurs where AD meets AS; an output gap arises when actual output differs from potential.
The multiplier magnifies the effect of an initial injection; the accelerator links investment to changes in output.
Inflation causes: demand-pull, cost-push and monetary growth. Effects include reduced purchasing power, uncertainty and international competitiveness effects.

In more detail

Worked AD: C £1,400bn + I £400bn + G £500bn + (X £800bn − M £850bn) = AD of £2,250bn.
Worked output gap: actual GDP £2,180bn and potential GDP £2,250bn → a negative output gap of £70bn, about −3.1% of potential.
Multiplier formula: in a simple closed economy, k = 1 ÷ (1 − MPC), so an MPC of 0.8 gives k = 5. Taxes and imports make the real UK multiplier much smaller.
Exam tip: on an AD/AS diagram, say whether AD or SRAS shifts, and explain the effect on both real GDP and the price level.

Practice

Measuring performance and AD/AS: 6 questions

Pick an answer to check it, or open the answer for the explanation.

1. Aggregate demand equals:

C + I + G + (X − M)
C + S + T
Wages + profits
GDP ÷ population

Show answer

A: C + I + G + (X − M). Consumption, investment, government spending and net exports.

2. A negative output gap means:

Actual output is above potential
Actual output is below potential, with spare capacity
Inflation is high
Exports exceed imports

Show answer

B: Actual output is below potential, with spare capacity. This is typically associated with higher unemployment.

3. Demand-pull inflation is caused by:

Rising costs of production
Excessive aggregate demand relative to supply
Falling wages
Cheaper imports

Show answer

B: Excessive aggregate demand relative to supply. AD grows faster than the economy's capacity.

4. What does the multiplier effect describe?

A fall in GDP
An initial injection leading to a larger eventual change in national income
A rise in interest rates
A trade deficit

Show answer

B: An initial injection leading to a larger eventual change in national income. The size depends on leakages such as savings, tax and imports.

5. Which shifts long-run aggregate supply to the right?

Higher wage costs
Investment in technology and skills
Higher taxes on firms
Reduced labour force

Show answer

B: Investment in technology and skills. LRAS reflects the economy's productive capacity.

6. What is the accelerator effect concerned with?

Prices rising quickly
The relationship between the rate of change of output and the level of investment
Interest rate changes
Exchange rate movements

Show answer

B: The relationship between the rate of change of output and the level of investment. Small changes in output can trigger larger changes in investment.

Keep going in Full Marks

Full Marks has 13 questions on Measuring performance and AD/AS (7 more than here), set out in practice levels. You also get notes and 3D models for all 8 subtopics of Macroeconomics, plus games, timed exams and past papers.

Practise 2.1 in Full Marks Open Macroeconomics

On your exam board

All A-level Economics Year 12 topics