Edexcel A-Level Economics (9EC0) | Theme 2 and Theme 4
A single revision page for the macroeconomics diagrams used across the Edexcel Theme 2 and Theme 4 notes. Each card keeps the original diagram image and adds a quick explanation of what to show in an exam answer.
Demand-pull inflation occurs when higher aggregate demand puts upward pressure on the average price level. Output may rise in the short run if the economy has spare capacity.
Use in exams: Use it for expansionary fiscal policy, loose monetary policy, confidence shocks or rising exports.
Cost-push inflation occurs when firms' costs rise and SRAS falls. The economy faces a higher price level and lower real GDP, creating a difficult trade-off for policymakers.
Use in exams: Use it for oil price shocks, wage rises, imported inflation and exchange rate depreciation.
A change in the price level causes a movement along AD. The curve slopes downward because of wealth, interest rate and international trade effects.
Use in exams: Use it when the price level changes but the components of AD have not shifted.
A rightward AD shift means total spending in the economy has increased at each price level. A leftward shift means total spending has fallen.
Use in exams: Use it for changes in consumption, investment, government spending, exports or imports.
SRAS slopes upward because higher prices can make output more profitable when some input costs are fixed in the short run.
Use in exams: Use it when explaining why output can respond to demand changes in the short run.
A rightward shift in SRAS means firms can supply more real output at each price level. This can lower inflationary pressure and increase real GDP.
Use in exams: Use it for lower commodity prices, improved productivity, lower taxes on firms or cheaper imported inputs.
The Classical LRAS curve is vertical because the long-run productive capacity of the economy depends on factor quantity, factor quality and technology, not the price level.
Use in exams: Use it when arguing that AD increases raise prices rather than long-run real output.
The Keynesian LRAS curve suggests output can be below full employment for a long time. Extra AD may raise output with little inflation when spare capacity is high.
Use in exams: Use it when evaluating demand-side policy in recessions and the importance of spare capacity.
LRAS shifts right when the economy can produce more at full capacity. This can come from more labour, better skills, improved technology, infrastructure or capital investment.
Use in exams: Use it for supply-side improvements, long-run growth and reduced inflationary pressure.
Equilibrium real national output is found where AD meets aggregate supply. The Classical and Keynesian views differ over whether the economy automatically returns to full employment.
Use in exams: Use it as a starting point before showing AD shifts, LRAS shifts or output gaps.
In the Classical model, the economy is assumed to return to full employment output in the long run. A rise in AD therefore mainly increases the price level rather than real national output.
Use in exams: Use it when evaluating why demand-side stimulus may become inflationary if the economy is already near full capacity.
In the Keynesian model, extra AD can raise output significantly when there is spare capacity. The price level may remain stable until the economy moves closer to full capacity.
Use in exams: Use it for recession stimulus, spare capacity and why demand-side policy may be less inflationary in a downturn.
Households provide factors of production and receive income. Firms produce goods and services and receive expenditure, creating a continuous circular flow.
Use in exams: Use it for national income, income flows and the relationship between output, income and expenditure.
Injections add spending to the circular flow, while withdrawals remove spending. National income is stable when planned injections equal planned withdrawals.
Use in exams: Use it for multiplier analysis, fiscal policy, trade changes and equilibrium national income.
The multiplier occurs because one person's spending becomes another person's income, creating further rounds of consumption and output. The final effect depends on leakages.
Use in exams: Use it for fiscal stimulus, investment projects and evaluating the size of the marginal propensity to consume.
Higher AD can move the economy closer to its productive potential, increasing actual growth. Because productive capacity is unchanged, the price level also rises.
Use in exams: Use it for recoveries, demand-side policies and actual growth caused by higher spending.
Short-run growth can occur when idle resources are brought back into use. The economy moves nearer to its frontier, but the frontier itself does not shift.
Use in exams: Use it for recovery from recession, falling unemployment and higher utilisation of spare capacity.
Long-run growth means the economy can produce more goods and services sustainably. A rightward LRAS shift can raise real GDP without the same inflationary pressure as demand-led growth.
Use in exams: Use it for productivity, investment, innovation, education and infrastructure.
An outward PPF shift means the economy can produce more of both goods. This reflects higher productive capacity rather than simply using existing resources more fully.
Use in exams: Use it for sustainable economic growth, capital accumulation and improvements in labour quality.
A negative output gap exists when actual GDP is below potential GDP. This suggests spare capacity, cyclical unemployment and downward pressure on inflation.
Use in exams: Use it for recessions, unemployment, spare capacity and arguments for demand-side stimulus.
In the Keynesian view, the economy can remain below full employment because weak AD may not correct itself quickly. Extra demand can raise output with limited inflation.
Use in exams: Use it when evaluating fiscal or monetary stimulus during a recession.
A positive output gap exists when actual GDP is above sustainable potential GDP. This usually creates inflationary pressure as resources become stretched.
Use in exams: Use it for booms, overheating, demand-pull inflation and contractionary policy.
The trade cycle shows fluctuations in actual growth around the economy's long-run trend. Booms can create inflationary pressure, while downturns can create unemployment.
Use in exams: Use it for cyclical instability, output gaps and the timing of macroeconomic policy.
Expansionary demand-side policy increases aggregate demand. Its impact on output and inflation depends on spare capacity and the shape of aggregate supply.
Use in exams: Use it for tax cuts, increased government spending, lower interest rates and QE.
In the Classical model, successful supply-side policy shifts LRAS right. This increases productive potential and can reduce inflationary pressure in the long run.
Use in exams: Use it for education, infrastructure, deregulation, tax incentives and labour market reforms.
In the Keynesian model, supply-side improvements can expand capacity and reduce bottlenecks, especially near the vertical section of LRAS.
Use in exams: Use it to show why supply-side policy may improve growth and inflation together, but often with long time lags.
The short-run Phillips curve suggests that lower unemployment may be associated with higher inflation, and higher unemployment with lower inflation.
Use in exams: Use it for conflicts between macroeconomic objectives and evaluation of demand-side policy.
Comparative advantage exists when a country can produce a good at a lower opportunity cost. Specialisation and trade can increase total welfare even if one country has an absolute advantage in both goods.
Use in exams: Use it for benefits of free trade, specialisation, opportunity cost and trade patterns.
A tariff raises the price of imported goods, reducing import demand and protecting domestic producers. It can create government revenue but also causes welfare losses.
Use in exams: Use it for protectionism, infant industries, retaliation, consumer welfare and government revenue.
Exchange rates are determined by demand and supply for a currency. Higher demand can cause appreciation, while higher supply can cause depreciation.
Use in exams: Use it for interest rate changes, trade flows, speculation, hot money and effects on inflation or net trade.
The further the Lorenz curve is from the line of perfect equality, the more unequal the distribution of income or wealth. The Gini coefficient summarises this inequality.
Use in exams: Use it for measuring inequality, comparing economies and evaluating redistribution policies.
The Kuznets curve suggests early development can increase inequality as workers move into higher-paid urban sectors, but inequality may later fall as incomes spread and the state redistributes more.
Use in exams: Use it for development, structural change, urbanisation and evaluating whether growth reduces inequality.
Buffer stock schemes aim to stabilise commodity prices and producer incomes. The authority buys excess supply when prices are low and sells stocks when prices are high.
Use in exams: Use it for primary product dependency, price volatility and strategies for development.
The Laffer curve suggests that very high tax rates can reduce incentives to work, invest or declare income, so total tax revenue may fall beyond a certain rate.
Use in exams: Use it for taxation, incentives, supply-side arguments and evaluating tax cuts.