OCR A Level Economics: Macroeconomics — Revision Notes

Condensed for the final weeks. For the full explanation, use the Macroeconomics study guide.

AD/AS and the multiplier

Aggregate demand (AD): components shift with anything other than price level; a change in price level causes a movement along AD, not a shift. Aggregate supply (AS): differs in short-run vs long-run response to price level.

Multiplier = 1 / (1 - MPC)

Worked example: the multiplier

MPC = 0.75.

Multiplier = 1 / (1 - 0.75) = 1 / 0.25 = 4

A £10m injection ultimately generates £40m of total extra national income once the multiplier works through successive spending rounds.

Policy objectives and the Phillips Curve

Growth, employment, inflation (CPI), balance of payments, income distribution (Gini/Lorenz). Phillips Curve: a short-run trade-off between inflation and unemployment — NOT a fixed, permanent relationship; the long-run curve is vertical at the natural rate (NAIRU).

The three policy tools

Policy	Key tools
Fiscal	Government spending, taxation, budget deficit/surplus, automatic stabilisers, Laffer curve
Monetary	Interest rates, money supply, inflation targets, quantitative easing
Supply-side	Privatisation, deregulation, infrastructure/education investment, labour market flexibility

Policy conflicts (3.4) run through the whole component — a policy boosting growth may also raise inflation; reducing unemployment may conflict with the balance of payments. Always evaluate a policy’s trade-offs, not just its benefits.

Worked example: a policy conflict

A government cuts interest rates to boost economic growth during a slowdown.

Objective pursued:    economic growth (lower rates encourage
                       borrowing, investment, consumer spending)
Objective threatened: price stability -- higher spending can push
                       demand-pull inflation above target; lower rates
                       can also weaken the currency, making imports
                       more expensive and adding cost-push inflation
                       on top of the demand-pull pressure
Balance of payments effect: a weaker currency tends to make exports
                       cheaper and imports dearer, which normally
                       improves rather than threatens the balance of
                       payments (see the J-curve and Marshall-Lerner
                       condition for the short-run exception)

Being able to name a specific policy action, state which objective it advances, and explain the mechanism by which it threatens a second objective – rather than listing objectives in isolation – is exactly what section 3.4 tests.

Why the five sections form one connected argument

Aggregate demand and supply (section 1) sets up the model; policy objectives (section 2) defines the targets a government aims for; implementing policy (section 3) shows the available tools, with 3.4 explicitly requiring evaluation of when those tools conflict. These notes touch the exchange-rate transmission mechanism only briefly, inside a policy-conflict example – the global context and financial sector content areas are not given their own recall notes here, so revise them separately from your course materials.

Key terms

Aggregate demand (AD) — total planned spending in an economy at a given price level. Multiplier — the factor by which a change in injections leads to a larger change in national income. NAIRU — the natural rate of unemployment, where the long-run Phillips Curve is vertical. Crowding out — increased government borrowing raising interest rates and reducing private sector spending/investment. Supply-side policy — measures aimed at shifting long-run aggregate supply through structural reform.

The circular flow and national income measurement

The circular flow of income models injections (investment, government spending, exports) and leakages (savings, taxation, imports) into and out of the economy – national income is in equilibrium when injections equal leakages. Know the standard methods of measuring national income (output, income and expenditure approaches) and be able to explain, at a basic level, why they should in principle produce the same total.

Common mistakes

• Treating a shift in AD and a movement along it as the same thing.
• Confusing fiscal and monetary policy, or describing supply-side policy only as “cutting taxes.”
• Evaluating a policy’s benefits without discussing its trade-offs (3.4 is explicitly about conflicts).
• Misreading the Phillips Curve as a fixed, permanent relationship.
• Ignoring the global context (exchange rates, trade policy) when answering a domestic policy question – remember these notes do not cover that content area in depth, so revise it separately.

Quick self-test

1. MPC = 0.8. Calculate the multiplier.
2. What causes a shift of AD, versus a movement along it?
3. Distinguish the short-run and long-run Phillips Curve.
4. Name the three types of macroeconomic policy.
5. Give one example of a policy conflict between two objectives.
6. Explain how a domestic interest rate cut can affect the exchange rate and, in turn, the balance of payments.

Answers: 1. Multiplier = 1 ÷ (1 − 0.8) = 1 ÷ 0.2 = 5. 2. Shift: a change in any AD component (consumption, investment, government spending, net exports) for a reason other than price. Movement: a change in the price level. 3. Short-run: a trade-off exists between inflation and unemployment. Long-run: vertical at the natural rate of unemployment (NAIRU), no trade-off. 4. Fiscal, monetary, supply-side. 5. Any valid example, e.g. a policy that boosts growth (lower interest rates) may also raise inflation, or reducing unemployment through demand-side stimulus may worsen the balance of payments. 6. Lower interest rates make the currency less attractive to hold (lower returns for savers/investors), which can weaken it; a weaker currency makes exports cheaper and imports more expensive, potentially improving the trade balance but also raising import-driven inflation.

How this connects to the synoptic paper

Component 3 (Themes in economics) is fully synoptic across both Microeconomics and Macroeconomics, so make sure you revise the global context and financial sector content areas from your course materials – they are not covered by these condensed notes – with an eye to how they connect back to microeconomic content such as market structures and exchange-rate determination, rather than treating Macroeconomics as entirely self-contained.

Related resources

• Macroeconomics study guide
• Macroeconomics practice questions

Official syllabus

OCR, A Level in Economics (H460) Specification, Section 2d, Component 2: Macroeconomics — ocr.org.uk.