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Grade A Macro Economic Essays
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Macro-Economic Essay PlansAO1 = Mechanics anything in red needs to be checked with a teacher just to make sure
AO3 = Analysis
AO4 = Evaluation
1. Explain, using a diagram, the shape of the Aggregate Demand (AD) function and the
factors which may cause it to shift.
Ao1 marks = 6 Marks AO3 = 4 Marks
(need to show the ad curve and a shift in the digfram depending on which explanation)
Definition = The aggregate demand curve represents the total quantity of all goods (and services)
demanded by the economy at different price levels.at a given time period.- Inverse relationship
P1- Wealth effect - As the price level rises, the wealth of the economy, as measured by the supply of
money, declines in value because the purchasing power of money falls. As buyers become poorer, they
reduce their purchases of all goods and services. On the other hand, as the price levelfalls, thepurchasing
power of money rises. Buyers become wealthier and are able to purchase more goods and services than
before. The wealth effect, therefore, provides one reason for the inverse relationship between the price
level and real GDP that is reflected inthe downward sloping demand curve. The shift is becase of an
increase in consumption
P2- Interest rate effect - when the price level increases, households and firms need to spend more
money to continue to consume the scarce resources they need. This makes them relatively ‘short
of cash’ than they were at the lower price level. The liquidity of an asset refers to how easily it is
converted to cash, with cash itself being ‘perfectly liquid’. The loss of liquidity associated with a
rise in the price level forces some households and firms to borrow from banks, which reduces the
liquidity of banks. In response, banks are likely to raise interest rates as compensation for this
lost liquidity. The banks need to keep a certain amount of their reserves in a highly liquid form to
meet any unexpected increase in demand for cash. The shift is because of an increase in
consumption or investnemnt
As a result of the lost liquidity, interest rates are forced to rise, and both household and corporate
spending may fall. Hence, aggregate demand is lower at the higher price level.
P3- Trade effect = A rise in domestic prices makes exports less competitive and imports more
competitive; hence exports (X) are likely to fall and imports (M) are likely to rise. Both of these
reactions combine to create a trade effect, with lower aggregate demand at the higher price level.
The shift is due to the effect it has on exports and importts
2. Explain the factors which may affect the level of investment in an economy.
Definition = Investment is an increase in capital stock
,P1- Interest rates- Interest rates affect the cost of borrowing. High interest rates will discourage firms
from investing as it is going to be more expensive to borrow money for capital investment... Vice Versa
P2- Economic growth- rising AD may encourage firms to invest on the basis that future profitability will
rise. The accelerator effect states that investment levels are related the rate of change of GDP. Thus an
increase in the rate of economic growth will cause a correspondingly larger increase in the level of
investment. But, a fall in the rate of economic growth will cause a fall in investment levels. ( why it
occurs : If firms see a rise in demand and expect this demand to be maintained, then they will soon start to
reach full capacity. Therefore, to meet future demand, they will respond by investing now. To meet a
growth in demand may require considerable investment outlay.)- diagram ?
P3- Confidence/expectations: eg animal spirits which refer to the state of confidence or pessimism held by
consumers and businesses. Expectations for the future inevitably influence decisions made by firms to
commit funds towards capital investment.
3. Evaluate the view that high levels of investment by firms and government are always
beneficial for the economy- plan
AO1= 6 marks AO3= 6 marks AO4 = 8 marks
Intro = definition of investment ….- initial judgment: they are not always beneficial, but more beneficial
than harmful 3 arguments- com0nent of ad aid economic growth and national income, positive impact on
lras and procutuvity and comeptiveness, govenrment investment in public and merit goods- then evals rq
P1- Investment a compnetent of ad- C+I+G+ X-M- shift ad- result in economic growht- growth in
national income – leaves society more well off- leads to an increases in gov revenue to aid society , better
public services ladida. (diagram here or for evaluation)
Eval- can lead to demand pull inflation(define) if the economy is already at full capacity – draw a
Keynesian diagram to show an increase in prices – neverthless, it is benefical when the economy is at low
capacity to help it grow and boom can lead to higher gdp without infaltion if it increas producitivy
capacity of the economy
P2- Helps improve the productivity in the economy, reduces unit labour costs and both price and non
price competitivness through improving researhc and decelpoment, this in trun leads to economic growth,
which can lead to lower employment as it means more spending bigger economy, higher animal spirits
and entraprenuship so more jobs avalaiable, which is y it is benefecial
Eval- Investment can lead to short term unemployment or depends on tiem, it takes a long time for these
effec ts to take place – in the shirt run the economy may be the same- neverhteless it is still beneficial
even if it takes time
P3- Government investment in infrastrucutre and merit goods, will increase prodcutity foe the economy –
E.g healthcare, welfare services – postive externality graph here – benefical because fo the positive
externalitites that come from it
Eval- could be inneftcive and lead to govenrment failure – HS2 IS AN EXAMPLE OF GOV FAILURE,
casues external costs ( no need to do a daigram) Nevetheless, still benefecial. Just has to be done
effecianyly
, Concuoison- still benefical despite its evaluations
4. Explain, using a diagram, the shape of the short run aggregate supply (SRAS) function
and the factors which may cause it to shift.
AO1 = 6 MARKS AO3 = 4 MARKS
Definition = This represents the total amount of goods and services that can supplied when the price level
changes but there is no change in the total quantity/quality of factors of production available in the
economy. The aggregate supply curve is related to a production possibility frontier (PPF). Both show the
productive capacity of an economy.
DRAW DIAGRAM- SIMPLE AD AS DIAGRAM
P1- Shape Of it - The short-run aggregate supply curve is upward sloping because the quantity supplied
increases when the price rises. As it becomes more profitable for firms ( profit motive), to provide their
goods and services , and the more factors of production that they hire to produce more output , the higher
those facors of production as they become more scarce. As out put rises in the short run, existeting facotrs
become less producitve, diminsing returns and this raises cost of production E.G. overtime, or capital
strats to depreciate
P2- Shifts- Sras shifts with a change in factors of production – E.g intrest rates increasing or decreasing,
lower material costs increasing or decreasing ( explain both)
5. Explain the process by which neo-classical economists argue that the economy can adjust
to long-run equilibrium following a negative demand side shock. Use a diagram to support
your answer.
AO1 = 6 MARKS AO3 = 4 MARKS
P1- A negative demand shock means that AD falls at all prices, causing the economy to move to short-
run equilibrium at an output below NAIRU/full employment SRAS shifts downwards because, in the long
run, wages (and other factor prices) are driven down, reducing firms’ costs. At a given level of real GDP,
the SRAS function is therefore lower. The reduction in prices leads to the establishment of a new
equilibrium back at the original supply-side constraint, but at a lower aggregate price level.
P2- As AD falls, this creates unemployment in labour markets (and other factor markets). Therefore,
wages are driven down, which reduces firms’ costs. Consequently, given perfect markets, there is
downward pressure on the aggregate price level in the economy. This fall in prices causes an extension in
AD because of trade effect, more conpetitve so increase in ad cos of components of it . Then real GDP
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