AQA A-Level Economics
MACROECONOMICS
STUDENT COMPANION
Authors: Cathy Williams and Geoff Riley
Series Editor: Ruth Tarrant
EDITION DATE: SEPTEMBER 2019
WWW.TUTOR2U.NET/ECONOMICS
,COMPANION CONTENTS
4.2.1.1 The objectives of government economic policy ................................................................ 3
4.2.1.2 Macroeconomic indicators ................................................................................................... 7
4.2.1.3 Uses of index numbers .......................................................................................................... 9
4.2.1.4 Uses of national income data ............................................................................................ 11
4.2.2.1 The circular flow of income ............................................................................................... 16
4.2.2.2 Aggregate demand and aggregate supply analysis..................................................... 22
4.2.2.3 The determinants of aggregate demand ....................................................................... 26
4.2.2.4 Aggregate demand and the level of economic activity ............................................... 40
4.2.2.5 Determinants of short-run aggregate supply ................................................................ 43
4.2.2.6 Determinants of long-run aggregate supply ................................................................. 47
4.2.3.1 Economic growth and the economic cycle ..................................................................... 57
4.2.3.2 Employment and unemployment .................................................................................... 69
4.2.3.3 Inflation and deflation ........................................................................................................ 79
4.2.4.1 The structure of financial markets and financial assets ................................................. 92
4.2.4.2 Commercial banks and investment banks...................................................................... 97
4.2.4.3 Central banks and monetary policy ...............................................................................104
4.2.4.4 The regulation of the financial system ..........................................................................113
4.2.5.1 Fiscal Policy .........................................................................................................................129
4.2.5.2 Supply-side policies ..........................................................................................................148
4.2.6.1 Globalisation .......................................................................................................................153
4.2.6.2 Trade ...................................................................................................................................160
4.2.6.3 The balance of payments ................................................................................................188
4.2.6.4 Exchange rate systems .....................................................................................................197
4.2.6.5 Economic growth and development .............................................................................216
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 2
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,4.2.1.1 The objectives of government economic policy
Key specification content:
• The main objectives of government macroeconomic policy
o Economic growth
o Price stability
o Minimising unemployment
o Stable balance of payments on current account
• Possible conflicts, at least in the short run
• Possible other objectives such as balancing the budget and an equitable distribution of income
• The importance attached to different objectives changes over time
What is Macroeconomics?
Macroeconomics considers the economy as a whole
• Macroeconomics studies relationships and connections between one country and another for
example, how a slowdown in the Chinese economy can affect UK businesses, or how a change in the
exchange rate affects British firms exporting to countries around the world
• The scope of macroeconomics includes looking at the success or failure of government policies – for
example does the government have effective and fair policies for cutting unemployment? Or has the
government succeeded in creating the conditions for a sustainable and balanced recovery?
• Macroeconomics involves looking at some big numbers! GDP is a good example, or figures for a
country’s balance of payments.
• Macroeconomics involves studying inflation, economic growth, human development, international
trade and globalisation. These are BIG topics and BIG issues – welcome to macro!
The City of London is a centre for global finance and a The spending decisions of millions of consumers add up
major source of income for our balance of payments, but to affect the performance of the economy – a fall in
it has been hit hard by a deep crisis in banking and related consumer spending nearly always leads to a downturn
financial services
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 3
SCHOOL LICENCE – Copyright Tutor2u
, Searching for work – unemployment has been rising Businesses need to forecast demand changes – what
quickly during the recent recession – how best can an UK might happen to sales and profits if there is a severe
reduce the level of unemployment? downturn in the Chinese economy?
Households, Businesses, Government and the Trade Sector
In macroeconomics we look at things ‘in the whole’ and, in doing so, we use these terms:
• Households: receive income through wages and salaries from their jobs and from their investments
and then buy the output of firms (this is known as consumer spending and is labelled as C)
• Firms: Businesses hire land, labour and capital inputs when making products for which they pay wages
and rent (income). Firms receive payment from consumers and profitable businesses may invest (I) a
percentage of profits in new producer goods such as equipment and technology
• Government: collect taxes (T) to fund spending on public services such as education, healthcare and
defence. Government spending is given the label (G)
• International sector: The UK buys imports from other countries, (M) and overseas businesses and
consumers buy UK products – known as exports (X). International trade is important for the UK.
Millions of jobs depend directly or indirectly on the UK remaining competitive in overseas markets
The objectives of macroeconomic policy
Objectives are the goals of government policy. There are four main goals:
• Sustainable economic growth
• Low and stable inflation
• Low unemployment
• A satisfactory balance of payments position
There are additional goals such as an equitable distribution of income, improved welfare or living standards
and a strong fiscal (budgetary) position.
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 4
SCHOOL LICENCE – Copyright Tutor2u
MACROECONOMICS
STUDENT COMPANION
Authors: Cathy Williams and Geoff Riley
Series Editor: Ruth Tarrant
EDITION DATE: SEPTEMBER 2019
WWW.TUTOR2U.NET/ECONOMICS
,COMPANION CONTENTS
4.2.1.1 The objectives of government economic policy ................................................................ 3
4.2.1.2 Macroeconomic indicators ................................................................................................... 7
4.2.1.3 Uses of index numbers .......................................................................................................... 9
4.2.1.4 Uses of national income data ............................................................................................ 11
4.2.2.1 The circular flow of income ............................................................................................... 16
4.2.2.2 Aggregate demand and aggregate supply analysis..................................................... 22
4.2.2.3 The determinants of aggregate demand ....................................................................... 26
4.2.2.4 Aggregate demand and the level of economic activity ............................................... 40
4.2.2.5 Determinants of short-run aggregate supply ................................................................ 43
4.2.2.6 Determinants of long-run aggregate supply ................................................................. 47
4.2.3.1 Economic growth and the economic cycle ..................................................................... 57
4.2.3.2 Employment and unemployment .................................................................................... 69
4.2.3.3 Inflation and deflation ........................................................................................................ 79
4.2.4.1 The structure of financial markets and financial assets ................................................. 92
4.2.4.2 Commercial banks and investment banks...................................................................... 97
4.2.4.3 Central banks and monetary policy ...............................................................................104
4.2.4.4 The regulation of the financial system ..........................................................................113
4.2.5.1 Fiscal Policy .........................................................................................................................129
4.2.5.2 Supply-side policies ..........................................................................................................148
4.2.6.1 Globalisation .......................................................................................................................153
4.2.6.2 Trade ...................................................................................................................................160
4.2.6.3 The balance of payments ................................................................................................188
4.2.6.4 Exchange rate systems .....................................................................................................197
4.2.6.5 Economic growth and development .............................................................................216
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 2
SCHOOL LICENCE – Copyright Tutor2u
,4.2.1.1 The objectives of government economic policy
Key specification content:
• The main objectives of government macroeconomic policy
o Economic growth
o Price stability
o Minimising unemployment
o Stable balance of payments on current account
• Possible conflicts, at least in the short run
• Possible other objectives such as balancing the budget and an equitable distribution of income
• The importance attached to different objectives changes over time
What is Macroeconomics?
Macroeconomics considers the economy as a whole
• Macroeconomics studies relationships and connections between one country and another for
example, how a slowdown in the Chinese economy can affect UK businesses, or how a change in the
exchange rate affects British firms exporting to countries around the world
• The scope of macroeconomics includes looking at the success or failure of government policies – for
example does the government have effective and fair policies for cutting unemployment? Or has the
government succeeded in creating the conditions for a sustainable and balanced recovery?
• Macroeconomics involves looking at some big numbers! GDP is a good example, or figures for a
country’s balance of payments.
• Macroeconomics involves studying inflation, economic growth, human development, international
trade and globalisation. These are BIG topics and BIG issues – welcome to macro!
The City of London is a centre for global finance and a The spending decisions of millions of consumers add up
major source of income for our balance of payments, but to affect the performance of the economy – a fall in
it has been hit hard by a deep crisis in banking and related consumer spending nearly always leads to a downturn
financial services
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 3
SCHOOL LICENCE – Copyright Tutor2u
, Searching for work – unemployment has been rising Businesses need to forecast demand changes – what
quickly during the recent recession – how best can an UK might happen to sales and profits if there is a severe
reduce the level of unemployment? downturn in the Chinese economy?
Households, Businesses, Government and the Trade Sector
In macroeconomics we look at things ‘in the whole’ and, in doing so, we use these terms:
• Households: receive income through wages and salaries from their jobs and from their investments
and then buy the output of firms (this is known as consumer spending and is labelled as C)
• Firms: Businesses hire land, labour and capital inputs when making products for which they pay wages
and rent (income). Firms receive payment from consumers and profitable businesses may invest (I) a
percentage of profits in new producer goods such as equipment and technology
• Government: collect taxes (T) to fund spending on public services such as education, healthcare and
defence. Government spending is given the label (G)
• International sector: The UK buys imports from other countries, (M) and overseas businesses and
consumers buy UK products – known as exports (X). International trade is important for the UK.
Millions of jobs depend directly or indirectly on the UK remaining competitive in overseas markets
The objectives of macroeconomic policy
Objectives are the goals of government policy. There are four main goals:
• Sustainable economic growth
• Low and stable inflation
• Low unemployment
• A satisfactory balance of payments position
There are additional goals such as an equitable distribution of income, improved welfare or living standards
and a strong fiscal (budgetary) position.
AQA A-Level Economics Macroeconomics Companion www.tutor2u.net/economics Page 4
SCHOOL LICENCE – Copyright Tutor2u
