OxfordAQA International A Level Economics
OxfordAQA International A Level Economics 3.2.2 How the Macroeconomy Works Exam Questions
Free OxfordAQA International A Level Economics revision for 3.2.2 How the Macroeconomy Works: what you need to know, common mistakes and exam-style questions with answers. Covers circular flow of income, aggregate demand and aggregate supply, components of ad, the multiplier, short-run and long-run aggregate supply.
Practise 3.2.2 How the Macroeconomy Works with past papers
Once you have learnt this topic, find the 3.2.2 How the Macroeconomy Works questions in real OxfordAQA International 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 OxfordAQA International A Level Economics 3.2.2 How the Macroeconomy Works
How the macroeconomy works gives you the main model for Unit 2 of the OxfordAQA International AS Economics course. It starts with the circular flow of income, including injections and withdrawals, then builds the aggregate demand and aggregate supply (AD/AS) model. You study the determinants of consumption, investment, government spending and net exports, how changes in AD affect output, employment and prices, and the multiplier. You then look at what shifts short-run and long-run aggregate supply. Every later macro topic uses this model. Examiners regularly ask you to draw and explain AD/AS shifts caused by a named event and to explain the multiplier process.
What you need to know
- 3.2.2.1 Circular flow Income flows between households and firms. Injections are investment, government spending and exports; withdrawals are saving, taxation and imports. National income rises when injections exceed withdrawals.
- 3.2.2.2 AD/AS analysis AD = C + I + G + (X - M). The AD curve slopes down; the short-run AS curve slopes up. Equilibrium real output and the price level are where they meet.
- 3.2.2.3 Determinants of AD Consumption depends on income, interest rates, wealth and confidence. Investment depends on interest rates, expected demand and business confidence. Net exports depend on exchange rates and incomes abroad.
- 3.2.2.4 AD and economic activity A rise in AD increases real output and employment, and the price level when the economy is near capacity. The multiplier means an initial injection leads to a larger final change in national income, because one person's spending is another's income.
- 3.2.2.5 Short-run AS SRAS shifts with changes in costs of production, such as wages, raw material prices, indirect taxes and exchange rates affecting import costs.
- 3.2.2.6 Long-run AS LRAS reflects productive capacity and shifts with the quantity and quality of factors of production, technology, productivity and institutions. It can be shown as vertical or with a Keynesian shape.
Common mistakes in 3.2.2 How the Macroeconomy Works
- Writing 'demand' instead of 'aggregate demand' and drawing micro supply and demand labels on an AD/AS diagram. Label the axes price level and real output.
- Shifting AS when the event affects spending, or AD when it affects costs. Decide first whether the change affects spending or costs of production.
- Explaining the multiplier without the chain of spending. Show how extra income is partly spent, creating further rounds of income.
- Confusing a movement along AD (due to a change in the price level) with a shift (due to a change in a component).
- Treating a rise in SRAS as long-run growth. Long-run growth needs an increase in productive capacity, shown by LRAS.
Try three 3.2.2 How the Macroeconomy Works exam-style questions
1. In an economy the marginal propensity to withdraw is 0.4. Government spending increases by $10 billion. Calculate the final increase in national income. (2 marks)
Show the mark scheme answer
Multiplier = 1 / 0.4 = 2.5; increase in national income = 2.5 x 10 = $25 billion.
2. Using an AD/AS diagram, explain the likely effect of a large rise in world oil prices on an oil-importing economy. (4 marks)
Show the mark scheme answer
Costs of production rise for firms; the SRAS curve shifts to the left; the price level rises (cost-push inflation); real output falls (diagram labelled with price level and real output).
3. Explain two factors that might cause investment to increase. (4 marks)
Show the mark scheme answer
A fall in interest rates lowers the cost of borrowing, making more projects profitable; rising business confidence or expected demand increases expected returns; government incentives or technological change also raise investment (any two, explained).
3.2.2 How the Macroeconomy Works FAQs
What does OxfordAQA International A Level Economics 3.2.2 How the Macroeconomy Works cover?
It covers the circular flow of income, the AD/AS model, the determinants of aggregate demand, the multiplier, and the determinants of short-run and long-run aggregate supply.
Which unit is 3.2.2 How the Macroeconomy Works examined in?
It is examined in Unit 2 (EC02), The national economy in a global environment, an International AS unit with multiple choice and data response questions. Units 3 and 4 are synoptic, so the ideas can also be used there.
How do I draw AD/AS diagrams correctly?
Label the vertical axis price level and the horizontal axis real output or real GDP. Show the original and new equilibrium and explain the shift in words, linking it to the cause in the question.
