OCR A Level Economics
OCR A Level Economics Aggregate Demand and Aggregate Supply Exam Questions
Free OCR A Level Economics exam questions for Aggregate Demand and Aggregate Supply, with a mark scheme for every pack. Covers the circular flow of income, components of aggregate demand, short-run and long-run aggregate supply, macroeconomic equilibrium and the multiplier.
Aggregate Demand and Aggregate Supply exam questions
1 question pack of real past exam questions, each with its mark scheme. Do not stop after a few: answer as many as you can without notes, then mark every answer with the mark scheme. The more questions you do, the more quickly you will spot how examiners ask about each idea.
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About OCR A Level Economics Aggregate Demand and Aggregate Supply
Aggregate Demand and Aggregate Supply is the core model of the Macroeconomics paper in OCR A Level Economics. You learn how the circular flow of income shows the links between households, firms, government and the rest of the world, how the components of aggregate demand are determined, and how short-run and long-run aggregate supply are shaped. You use the AD/AS model to analyse changes in real output, the price level and employment, and you study the multiplier. The model is used to analyse economic policy objectives and to evaluate fiscal, monetary and supply-side policies. Examiners expect correct, well-labelled AD/AS diagrams.
What you need to know
- Circular flow of income Flows of income and spending between households and firms, with injections (investment, government spending, exports) and withdrawals (saving, taxation, imports).
- Aggregate demand AD = C + I + G + (X - M). Determinants of consumption (income, interest rates, wealth, confidence), investment (interest rates, expectations, accelerator), government spending and net exports (exchange rates, foreign incomes, relative inflation).
- Aggregate supply SRAS shifts with costs of production such as wages, raw materials and taxes. LRAS shifts with the quantity and quality of factors of production and productivity. Know classical (vertical) and Keynesian (reverse L-shaped) LRAS.
- Macroeconomic equilibrium Equilibrium is where AD meets AS. Shifts in AD or AS change real output and the price level; the size of the effect depends on the slope of AS and spare capacity.
- The multiplier Multiplier = 1 / (1 - MPC) or 1 / MPW. An initial injection leads to a larger final change in national income; the size depends on withdrawals.
Common mistakes in Aggregate Demand and Aggregate Supply
- Shifting AD when the price level changes. That is a movement along AD.
- Including transfer payments in G. Benefits and pensions are not government spending on goods and services.
- Shifting LRAS for short-term cost changes. Rising oil prices shift SRAS; LRAS shifts with productive capacity.
- Ignoring spare capacity. An increase in AD with spare capacity mainly raises output; at full capacity it mainly raises the price level.
- Forgetting the multiplier works in both directions. A fall in an injection reduces national income by a multiple.
Try three Aggregate Demand and Aggregate Supply exam-style questions
1. The marginal propensity to consume is 0.6. Investment increases by 8 billion pounds. Calculate the final increase in national income. (2 marks)
Show the mark scheme answer
Multiplier = 1 / (1 - 0.6) = 2.5; increase in national income = 2.5 x 8 billion = 20 billion pounds.
2. Explain how a fall in consumer confidence may affect real output and the price level. (4 marks)
Show the mark scheme answer
Consumers delay spending and save more; consumption falls, shifting AD left; real output falls and the price level falls or rises more slowly; negative multiplier effect magnifies the fall; diagram showing AD shift.
3. Evaluate the significance of the size of spare capacity for the effect of an increase in aggregate demand. (12 marks)
Show the mark scheme answer
With a Keynesian LRAS and a large negative output gap, an increase in AD raises real output and employment with little inflation; as the economy nears full capacity, the increase mainly raises the price level; at full capacity it is purely inflationary; evaluation: classical economists argue LRAS is vertical; measuring spare capacity is difficult; supply-side policies can raise capacity; supported judgement.
Aggregate Demand and Aggregate Supply FAQs
What does OCR A Level Economics Aggregate Demand and Aggregate Supply cover?
It covers the circular flow of income, the components of AD, short-run and long-run AS, macroeconomic equilibrium and the multiplier.
Which paper is Aggregate Demand and Aggregate Supply examined in?
It is examined in Paper 2, Macroeconomics (H460/02) and is often used in Paper 3, Themes in Economics.
How do I draw an accurate AD/AS diagram?
Label the vertical axis price level and the horizontal axis real output or real GDP. Show the original and new equilibrium and label each curve and shift clearly.
