1. Preparing for the May 2011 AQA AS Unit 2 Economics Macro Paper
Geoff Riley
May 2011

2. Recent AQA Unit 2 Papers January 2009:
Productivity growth and importance for macro performance
Household savings and importance for macro performance
June 2009:
Inflation and monetary policy, Inflation and AD
Growth and consumption
January 2010:
Exchange rate, Balance of Payments
Economic cycle and unemployment
June 2010:
Causes and consequences of a fall in investment spending
Economies in recession, policies to help the UK recover from recession
January 2011:
Demand and supply side policies to generate higher economic growth
Role of fiscal and monetary policy in maintaining economic stability

3. Some possibilities for May 2011
Causes of economic recovery, stimulus policies and multiplier/accelerator
Why is inflation persistently above target, achieving growth without inflation
Demand and supply-side shocks including oil & food prices
Difficulties in achieving macro aims (policy “trade-offs”)
Output gap, unemployment and inflation / deflation
Saving and consumer spending and real disposable incomes
Demand and supply-side causes of unemployment
Demand and supply-side policies to reduce unemployment
Policies to improve balance of payments in recent years (current account only)
Interest rates & their impact on the macro-economy / credit supply and cost
Cuts in government spending and their possible economic effects
Changes in the exchange rate and their macro impact (AD and SRAS)

4. Reminder about timing 75 minute paper
25 Q multiple choice paper – 20 mins
Data response question
(1) Key term definition (5 marks) – 2 min
(2) Data description (8 marks) – 5 min
(3) Explanation question (12 marks) – 15 min
(4) Evaluation question (25 marks) – 30 min

5. What is core? Determinants of macroeconomic performance
Understanding of AD-AS analysis
Using this analysis to explore recent and current economic behaviour and events
Analysing and critically evaluating a range of macroeconomic policies (e.g. MP, FP and SS-P)
How do policies work? The transmission mechanism
What are the limitations / constraints of each policy?
Understanding the external environment and how it impacts on the British economy
Being aware of how the different macroeconomic topics link together e.g. Inflation and unemployment

6. Macroeconomic performance and stability
Domestic objectives:
GDP: Real economic growth (short and long term)
CPI: Price stability (low stable positive inflation)
Achieving higher employment / less unemployment
Higher living standards (i.e. GDP per capita and other measures of well-being and social welfare)
External objectives
Sustainable position on the current account of the BoP
Maintaining competitiveness in the global economy
Restoring and then maintaining economic stability
Smoothing some of the volatility in key macro objectives such as inflation, growth and unemployment

7. Trying to achieve macro stability

8. The output gap is negative

12. Oil prices affect AD and SRAS

13. Jobs and prices

14. Trend growth is falling – why?

15. How much borrowing can the UK take?

16. Govt Spending has macro & micro effects

17. Taxes also have microeconomic effects!

18. UK exposed to external demand shocks
A big rise or fall in the exchange rate
Recession in major trading partners which affects the demand for exports
A prolonged slump in the housing market
The credit crunch – squeezing the supply of loans – impact on businesses and consumers
Unexpected (large) changes in interest rates or taxes

19. A fall in aggregate demand
Price Level
An initial change in AD can have a much greater final impact on equilibrium national income. This is known as the multiplier effect
LRAS
AD2
AD1
SRAS Y1 Y2
Real National Output

20. Supply-side shocks Supply side can be affected by shock effects
Some of these are negative for growth and inflation – other supply-side shocks can have a positive impact
SRAS:
Changes in global food prices
Volatility in the prices of imported raw materials / energy
Changes in import tariffs and other import controls
Changes in indirect taxes on businesses and subsidies
LRAS
Impact of new technologies on costs and productivity
Long term impact of innovation and invention
Unexpected changes in the size of net labour migration

21. A fall in short run aggregate supply
Price Level
A fall in SRAS might be caused by higher costs of production – leading to lower supply at each price level
LRAS
AD1
SRAS2
SRAS1 Y2 Y1
Yfc
National Output

22. An increase in productive potential
Price Level
An increase in the supply-side capacity of the economy is shown by shift in LRAS
LRAS
LRAS2
AD1
SRAS1 Y1
Yfc
Yfc2
National Output

23. Macro Evaluation (1) Most macro problems have multiple causes
No single macro policy works in isolation
Combination of policies needed for short & longer term
Demand side policies and supply side policies
Be clear on the main ideas behind Keynesian macro theory
Remember – economics is a social science – we can never be certain about how people will respond
Expectations and confidence are crucial – e.g. Weak animal spirits during the early stages of a recovery
Policy time lags are uncertain e.g. The time lag between economic recovery and falling unemployment
Use data to support or reject a point of view
Question reliability of the data – especially if out of date

24. Macro Evaluation (2) Importance of macro awareness / knowledge
It is crucial that you show an awareness of what is actually happening in the British economy
Use extracts in your answer to Q (3) – make at least three explicit data references in your final answer (from charts, table and text)
Also show awareness of events / issues in other countries – useful for comparative illustrations e.g. Events in the USA, Europe, China
AD-AS analysis must always be used as foundation to show impact on output, prices, employment
The UK is an open economy vulnerable to external events
Remember to offer a clear final conclusion in the 25 mark Q – this is essential to get a level 5 answer in the 25 marker

25. Evaluation phrases However Hence Nevertheless Although
It is likely that
With the benefit of hindsight
On the other hand
In the short run …….. but in the long run
It depends upon (e.g. price elasticity of demand, what happens to the exchange rate, etc.)
The data suggest that ... But the data in the extract is out of date
According to the article the writer argues that …… but

26. Remember the Wee-Steps Approach
Wider context – consider the bigger picture in an issue and use it to weight your arguments E
Efficiency – Does this achieve a more/less efficient allocation of resources?
Equality – Do some parties benefit more/less than others from a policy change? S
Scope – How many people are affected by the point? Is it wide reaching or narrow? T
Time – How long will it last, SR or LR or both?
Effectiveness – does it solve the issue it was intended to solve? Are there better alternatives? P
Prioritisation – which of your points is the strongest and why. Be specific about the context of the question – use this in your final paragraph
Scale or Magnitude – where people are affected how strong is the impact?

27. UK economy at a glance % change unless stated 2009 2010 2011
Consumer spending
-3.3
1.3
-0.5
Government consumption
1.0
1.2
-1.0
Investment
-15.4
3.5
5.5
Stock-building (% GDP)
-1.2
0.1
0.5
Domestic demand
-5.5
2.7
0.8
Exports
-10.1
5.3
6.5
Imports
-11.9
8.0
GDP
-4.9
1.7
1.5

28. At a glance (2) % change unless stated 2009 2010 2011
Manufacturing output
-10.7
3.8
4.0
Company profits
-7.5
1.0
3.0
Unemployment LFS measure (%)
7.6
7.9
8.6
Unemployment CC measure (%)
4.9
4.8
5.3
Average earnings (inc. Bonuses
-0.1
2.2
RPI Inflation
-0.5
4.5
3.2
CPI Inflation
2.1
3.3
Productivity (output per worker)
-3.5
1.5
1.7

29. At a glance (3) % change unless stated 2009 2010 2011
BoP Current Account Balance (% GDP)
-1.7
-2.3
-2.0
Government Budget (Fiscal) Balance (% GDP)
-11.8
-10.1
-7.7
Gross government debt (% of GDP)
71.3
77.9
82.6
US Dollar /£ exchange rate (annual average)
$1.62
$1.55
$1.40
Sterling / Euro exchange rate (annual average)
Euro 1.13
Euro 1.19
Euro 1.22
Monetary policy: Base (policy) interest rate (%)
0.5
0.50
10-year UK government bond yield (%)
4.1
3.7
2.75
World economic growth
-0.8
4.5
3.5