CIE A Level Economics 4 The Macroeconomy Exam Questions

About CIE A Level Economics 4 The Macroeconomy

Topic 4 introduces macroeconomics at AS Level in the Cambridge 9708 syllabus. You learn how national income is measured (GDP, GNI and NNI, at market prices and basic prices, real and nominal), how the circular flow works with injections and leakages, and how to use the AD/AS model to analyse changes in output and the price level. The topic then covers economic growth, unemployment and its measurement, and inflation and deflation, including how a consumer price index is built. It provides the base for policy analysis in topic 5 and the A Level macro topics 9 and 10. Examiners often ask for AD/AS diagrams and index number calculations.

What you need to know

• 4.1 National income statistics GDP is the value of output produced within a country; GNI adds net primary income from abroad; NNI subtracts depreciation (capital consumption). Market prices include indirect taxes and subsidies; basic prices remove them. Real figures are adjusted for inflation.
• 4.2 Circular flow Income flows between households and firms. Injections are investment, government spending and exports; leakages (withdrawals) are saving, taxation and imports. National income is in equilibrium when injections equal leakages.
• 4.3 AD and AS AD = C + I + G + (X - M). AD slopes down because of real wealth, interest rate and international trade effects. Short-run AS slopes upward; long-run AS can be drawn vertical (classical) or with Keynesian horizontal, rising and vertical sections.
• 4.4 Economic growth Actual growth is an increase in real GDP; potential growth is an increase in productive capacity. Causes include investment, technology, education and labour force growth; know the economic cycle and output gaps.
• 4.5 Unemployment Unemployment is the number of people willing and able to work who are without a job. Know the claimant count and ILO labour force survey methods, the unemployment rate formula, and the frictional, structural, cyclical and seasonal types.
• 4.6 Price stability Inflation is a sustained rise in the general price level; deflation is a sustained fall. Know demand-pull and cost-push causes, how a weighted CPI is built from a base year, and the effects on consumers, firms, government and international competitiveness.

Common mistakes in 4 The Macroeconomy

• Using national income to mean the money supply or the government's budget. National income is the total income or output of the economy, measured by GDP, GNI or NNI.
• Saying a fall in the inflation rate means prices are falling. Prices are still rising, only more slowly; falling prices is deflation.
• Mixing up the AD curve with a microeconomic demand curve. AD slopes down for macro reasons (wealth, interest rate and trade effects), not because of substitution between goods.
• Calculating the unemployment rate as unemployed divided by the whole population. It is unemployed divided by the labour force, times 100.
• Assuming any rise in AD only raises output. The effect on real output and the price level depends on how close the economy is to full capacity.

Try three 4 The Macroeconomy exam-style questions