CIE A Level Economics
CIE A Level Economics 9 The Macroeconomy Exam Questions
Free CIE A Level Economics revision for 9 The Macroeconomy: what you need to know, common mistakes and exam-style questions with answers. Covers the multiplier, growth and sustainability, living standards, unemployment theory, money, banking, credit creation and interest rate theories.
Practise 9 The Macroeconomy with past papers
Once you have learnt this topic, find the 9 The Macroeconomy questions in real CIE A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CIE A Level Economics 9 The Macroeconomy
Topic 9 is the A Level macroeconomics section of the Cambridge 9708 syllabus, building on topic 4. It extends the circular flow with the multiplier, the accelerator and the average and marginal propensities to consume, save and import. It then looks at the causes and costs of growth, how growth can be made sustainable, and how national income figures compare living standards, including the limits of GDP and alternative measures. Employment theory covers equilibrium and disequilibrium unemployment and the natural rate. The final part is money and banking: functions of money, the money supply, credit creation and theories of interest rate determination. Examiners often set multiplier calculations.
What you need to know
- 9.1 Circular flow and multiplier Multiplier k = 1 / (1 - MPC), or 1 / (MPS + MPT + MPM) in an open economy with government. A change in injections causes a larger final change in national income. The accelerator links investment to the rate of change of national income. Know inflationary and deflationary gaps.
- 9.2 Growth and sustainability Growth comes from more or better resources and higher productivity. Sustainable growth meets present needs without reducing the ability of future generations to meet theirs. Costs of growth include environmental damage, inequality and resource depletion.
- Measuring living standards Real GDP per head is a common measure but ignores the informal economy, inequality, leisure and the environment. Alternatives include the Human Development Index (health, education and income), Multidimensional Poverty Index and other composite indicators.
- 9.3 Employment and unemployment Equilibrium (natural) unemployment includes frictional and structural; disequilibrium unemployment includes demand-deficient and real wage unemployment. Know labour force participation and how the natural rate relates to the long-run Phillips curve.
- 9.4 Money and banking Functions of money: medium of exchange, store of value, unit of account and standard of deferred payment. Commercial banks create credit by lending, limited by liquidity and capital requirements. The central bank acts as lender of last resort and regulator.
- Interest rate theories Keynes' liquidity preference theory: demand for money is made up of transactions, precautionary and speculative motives, and interest rates are set where money demand meets money supply. Loanable funds theory: interest rates are set by the supply of saving and demand for borrowing.
Common mistakes in 9 The Macroeconomy
- Using 1 / MPC for the multiplier. The correct formula is 1 / (1 - MPC), equivalent to 1 / MPW in an open economy.
- Saying higher GDP per head proves living standards are higher. It ignores distribution, non-market output, working hours and environmental costs.
- Treating the accelerator and the multiplier as the same thing. The multiplier works from a change in spending to income; the accelerator works from a change in income to investment.
- Stating that banks only lend out deposits. Bank lending creates new deposits, which is how credit creation increases the money supply.
- Mixing up the speculative motive with saving for emergencies. Emergencies are the precautionary motive; the speculative motive relates to expected bond prices and interest rates.
Try three 9 The Macroeconomy exam-style questions
1. In an economy MPS = 0.1, MPT = 0.2 and MPM = 0.2. Calculate the multiplier and the final change in national income after a $40 billion rise in government spending. (3 marks)
Show the mark scheme answer
MPW = 0.1 + 0.2 + 0.2 = 0.5; k = 1 / 0.5 = 2; change in national income = 2 x $40 billion = $80 billion.
2. Explain two functions of money. (4 marks)
Show the mark scheme answer
Medium of exchange: widely accepted in payment, removing the need for a double coincidence of wants under barter; store of value: allows purchasing power to be kept for future use, provided inflation is low; (accept unit of account or standard of deferred payment, explained).
3. Discuss whether GDP per head is a good measure of living standards. (12 marks)
Show the mark scheme answer
Explains real GDP per head and its usefulness for comparisons over time and between countries; explains limits: inequality, informal and non-market output, quality of life, environment, purchasing power differences; compares with HDI and other indicators which have their own weaknesses; judgement that it is a useful but incomplete measure.
9 The Macroeconomy FAQs
What does Cambridge International AS and A Level Economics topic 9 The Macroeconomy cover?
It covers the multiplier and accelerator, economic growth and sustainability, measures of living standards, employment and unemployment theory, and money, banking and interest rate theories.
Which paper is topic 9 examined in?
It is A Level content, assessed in Paper 3 and Paper 4, with the AS macroeconomics of topic 4 assumed.
What formulas do I need for topic 9?
The multiplier, k = 1 / (1 - MPC) or 1 / (MPS + MPT + MPM), the definitions of MPC and APC, and the basic credit creation idea that new deposits support further lending.
