This document provides an overview of macroeconomic concepts related to economic growth, aggregate demand, and aggregate supply. It defines key terms and indicators such as inflation, unemployment, and economic growth. Graphs and tables show UK macroeconomic data on growth trends, aggregate demand components, and the output gap. The document provides exam tips on defining concepts, interpreting data, and using the PEEEL structure for longer answers. It also includes sample exam questions and tasks analyzing factors that affect aggregate demand and supply.

1. CYCLES AND GROWTH
AS Macro
Session 1

4. TASK: What are the main indicators of
macro-economic performance?
Inflation Unemployment
Economic
Growth
Fiscal
objectives
You have 30 seconds
Income inequality…
Environmental
objectives… Current
account sustainability…

5. Exam tip: Definitions
Throughout your answers you will need
to provide definitions of the key
economic concepts. Sometimes a
question will explicitly ask for a
definition and at other times you will
need to define a concept as part of a
longer answer on a wider set of topics.
Definitions should be succinct but
contain the core information to
illustrate the meaning of a concept. At
times, a diagram may be the best way to
illustrate a definition.

6. Tips on interpreting macro data

7. UK Growth, quarter on previous quarter
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
%
Key point:
The length of the positive and
negative growth periods vary.
Since 2007 the changes in
growth has seen rapid variation.
5 consecutive quarters of
negative real GDP
growth
Double dip…?

8. AGGREGATE DEMAND =
C I G X M
CONSUMER
EXPENDITURE
INVESTMENT
GOVERNMENT
SPENDING EXPORTS IMPORTS

9. Task:
Disposable
income falls
A decrease in
VAT
An increase in
income tax
An increase in
savings rate
A decrease in
interest rates
A decrease in
investment by
private sector
firms
A decrease in
Government
spending on
the Armed
forces
Exchange rate
increases
Trade
agreements
with BRIC
nations
Increased
productive and
allocative
efficiency in
MINT nations
Increased
spending on
the NHs
A decrease in
income tax
An increase in
investment by
UK car
manufacturers
An increase in
Government
spending on
overseas aid
An increase in
unemployment
A decrease in
saving rate
An increase in
the minimum
wage
A slump in the
housing market
Financial crisis
in the USA
An increase in
VAT
Exchange rate
decreases
An increase in
interest rates
A reduction in
confidence by
consumers
A general
increase in
share prices
Continued
recession in
Eurozone area
Look at these factors that affect aggregate demand.
Which two have the biggest impact on consumer
spending and exports of goods and services and why?
You have 3 minutes

10. Task:
Look at these factors that affect aggregate demand.
Which two have the biggest impact on consumer
spending and exports of goods and services and why?
Which have an impact on consumption Why is this most significant?
Disposable
income falls
Spending on non-
essential items
falls immediately
An increase in
interest rates
Large number of people
who have mortgages see
payments rise so spending
on non-essential items
falls immediately
C is c.66% of AD in UK…
c.30% in China
In UK more so than in
Germany…

11. Task:
Look at these factors that affect aggregate demand.
Which two have the biggest impact on consumer
spending and exports of goods and services and why?
Which have an impact on exports Why is this most significant?
Exchange rate
decreases
All exports become
less expensive
abroad so sales rise
Continued
recession in
Eurozone area
Eurozone is the most
important trading area
for the UK
Depends how important
X is to your GDP e.g.
Singapore and Germany
vs U.S and U.K
c.50% of UK X to
Eurozone (vs 17% to
USA)

12. Task:
You have 2 minutes
Exam tip: Data Interpretation
• Each key point is put in a separate paragraph
to clearly indicate to the examiner that you are
making different points
• Each point should use data from the table or
chart
• Use of data must be accurate (don’t estimate)
and include correct units
• Only explain the data if asked to do so.
• If looking at a time-trend include the trend for
the entire period shown as well as smaller
‘blips’ in the pattern.
Look at the data on UK Aggregate Demand on page 5.
Compare 2 significant features of the data provided
above for the UK Aggregate Demand Components.

13. Significant feature 1
Significant feature 2
All components saw a decrease in the percentage
change in 2011 compared to variable changes in
other years. For example, G saw a 0.5% per cent
fall.
Government consumption had the least amount of change
over the time period, with the variance between -0.7% and
1.7% (2.4 percentage points). By contrast, Imports saw a
variance of between 0.3% and 7.9% (7.6 percentage points)
Task:
Look at the data on UK Aggregate Demand on page 5.
Compare 2 significant features of the data provided
above for the UK Aggregate Demand Components.

14. AD-AS Analysis

15. UK Car Production
Factor 1: Recession led to a decrease in aggregate
demand and a downturn in production.
Average
Price Level
Real National Output
AD1
SRAS1
P1
Y1
AD2
P2
Y2
• Key concepts: Accelerator;
Derived demand

16. UK Car Production
Factor 2: Continued investment in research and
development improved production techniques.
Average
Price Level
Real National Output
AD1
SRAS1
P1
Y1
P2
Y2
SRAS2

17. UK Car Production
Suggest 3 other factors that can shift the short-run
aggregate supply curve that could account for the
improvement in the output of cars in the UK.
You have 2 minutes
1
2
Increase in investment on training. To
ensure that UK workers are as competitive
as foreign workers in car industry.
Use of high capacity factory to improve
economies of scale – particularly important
to reduce costs in motor industry
3 Reduction in corporation tax leading to
overall reduction in costs
Affects RULCs…
Lowers LRAC
Anything that affects
costs, effects SRAS

18. Some analysis
Explaining the cause and effect of a
factor is the key to good analysis in
exams. If an alteration of one factor
(e.g. investment) leads to an increase
or decrease in another (e.g.
unemployment), explain the full
‘chain’ of analysis (i.e. how one leads
to the other) is important.

19. Long Run Aggregate Supply
TASK: Analyse the view that inward
investment into the UK (such as an
increase in inward investment from
China) leads to an increase in long
run aggregate supply in the UK.
This means
that…
This can
lead to…
This can
cause…
It depends
upon…
Inward investment into the UK
There is an
increase in
investment in
UK
manufacturing
An increase in
the productive
efficiency of
UK
manufacturing
A reduction in
the average
cost of goods
manufactured
in the UK
The quality of
the
investment
and the
nature of it

20. Reason why it is very important:
Can improve the long-term
productivity of UK without
requiring Government finances
A factor that may be more
important:
The skills taught in schools and
colleges
Long Run Aggregate Supply
TASK: Analyse the view that inward
investment into the UK (such as an
increase in inward investment from
China) leads to an increase in long
run aggregate supply in the UK.
Inward investment into the UK

21. The Output Gap
A succinct definition:
Difference between actual
level of real GDP and potential
(trend) level of real GDP

22. The Output Gap
A negative output gap for the UK
economy could lead to:
You have 1 minute
1
2
An inefficient use of economic resources
leading to higher unemployment
Excess labour leads to downward pressure
on wages (wage freezes or cuts)

23. Evaluation
In terms of structure to longer
answers, one approach is to
use the PEEEL method.

24. ASK: Analyse the view that a negative output
gap will automatically lead to lower inflation.
P
E
E
E
L
You have 2 minutes

25. ASK: Analyse the view that a negative output
gap will automatically lead to lower inflation.
P
E
E
E
L
Lower AD… leads to higher cyclical
unemployment and… lower consumption
Output gap evidence during latest recession (see
chart), led to lower consumption
Lower consumption forces markets to start to
freeze prices or keep price rises small… AD/AS
diagram…
This may lower Demand Pull inflation but Cost-
Push inflation may rise due to external pressures
The negative output gap in the UK has not
automatically lead to lower inflation

26. 10/04/2014
Email: g.riley@etoncollege.org.uk Twitter: @tutor2u_econ