Eduqas A Level Economics
Eduqas A Level Economics Macroeconomic Theory Exam Questions
Free Eduqas A Level Economics revision for Macroeconomic Theory: what you need to know, common mistakes and exam-style questions with answers. Covers the circular flow, aggregate demand, SRAS and LRAS, AD/AS analysis and the short and long run Phillips curves.
Practise Macroeconomic Theory with past papers
Once you have learnt this topic, find the Macroeconomic Theory questions in real Eduqas 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 Eduqas A Level Economics Macroeconomic Theory
Macroeconomic theory is the foundation of the Eduqas macroeconomics content. It starts with the circular flow of income, injections, withdrawals and the multiplier process, then builds the aggregate demand (AD) and aggregate supply (AS) model. You need the components of AD, what shifts AD and SRAS, the Keynesian and Neo-Classical views of LRAS, and how to use AD/AS diagrams to analyse shocks and policy. The topic ends with the short run and long run Phillips curves, linking unemployment, inflation and expectations. Everything in macroeconomic objectives and policy instruments is analysed with these tools, so examiners expect precise AD/AS diagrams in all three components.
What you need to know
- Circular flow of income Income = output = expenditure. Injections are investment, government spending and exports; withdrawals are savings, taxation and imports. National income is in equilibrium when injections equal withdrawals. A change in an injection has a multiplier effect on national income (you do not need to calculate the multiplier for Eduqas).
- Components of AD AD = C + I + G + (X - M). Consumption is the largest component and depends on income, interest rates, wealth and confidence. Investment depends on interest rates, expected demand and business confidence.
- The AD function AD slopes downward because a lower price level raises real wealth, makes UK goods more competitive and reduces interest rates. Changes in any component at a given price level shift AD.
- SRAS Short run aggregate supply slopes upward and shifts with changes in costs of production such as wages, raw material and energy prices, indirect taxes and the exchange rate.
- LRAS: Keynesian and Neo-Classical The Neo-Classical LRAS is vertical at full employment output, so in the long run AD changes affect only the price level. The Keynesian AS curve is horizontal at low output with spare capacity, then becomes vertical at full capacity. LRAS shifts with the quantity and quality of factors of production and technology.
- AD/AS analysis Use AD/AS diagrams to show demand side shocks (e.g. a fall in confidence), supply side shocks (e.g. an oil price rise) and the effect of policies on real output and the price level.
- Phillips curves The short run Phillips curve shows an inverse relationship between inflation and unemployment. In the long run, expectations adjust, the SRPC shifts and the long run Phillips curve is vertical at the natural rate of unemployment (NAIRU). Holding unemployment below the natural rate leads to accelerating inflation.
Common mistakes in Macroeconomic Theory
- Labelling AD/AS axes Price and Quantity. Use Price level and Real output (or Real GDP).
- Listing taxation as a component of AD. AD is C + I + G + (X - M); taxes affect consumption but are a withdrawal, not a component.
- Shifting AD for a change in the price level. A change in the price level causes a movement along AD; shifts come from changes in its components.
- Assuming the Phillips curve trade-off holds in the long run. In the Neo-Classical view the long run Phillips curve is vertical, so there is no lasting trade-off.
- Ignoring the starting point on a Keynesian AS curve. Increasing AD with lots of spare capacity raises output with little inflation, but near full capacity it mainly raises prices.
Try three Macroeconomic Theory exam-style questions
1. State the four components of aggregate demand. (2 marks)
Show the mark scheme answer
Consumption; investment; government spending; net exports (exports minus imports). (All four for 2 marks, two or three for 1 mark.)
2. Using an AD/AS diagram, explain the likely effect of a large rise in global energy prices on the UK economy. (6 marks)
Show the mark scheme answer
Energy is a key input so costs of production rise; SRAS shifts left; price level rises (cost-push inflation); real output falls; creates stagflation risk with higher unemployment; correct diagram with original and new equilibria.
3. Explain why the long run Phillips curve is vertical in the Neo-Classical view. (4 marks)
Show the mark scheme answer
Workers form expectations of inflation; if unemployment is pushed below the natural rate, inflation rises; workers then expect higher inflation and bargain for higher wages, shifting the SRPC up; unemployment returns to the natural rate at a higher inflation rate, so there is no long run trade-off.
Macroeconomic Theory FAQs
What does Eduqas A Level Economics Macroeconomic Theory cover?
It covers the circular flow of income, the components of aggregate demand, the AD and AS functions, SRAS and LRAS (Keynesian and Neo-Classical), AD/AS analysis and the short and long run Phillips curves.
Do I need to calculate the multiplier for Eduqas?
No. You need to explain the multiplier process in the circular flow, but the Eduqas specification states that calculation of the multiplier is not required.
How should I practise AD/AS diagrams?
Take a recent news event, decide whether it shifts AD, SRAS or LRAS, then draw and explain the effect on real output and the price level. Try it with both Keynesian and Neo-Classical LRAS to compare outcomes.
