On an AD/AS diagram, what is the effect on real output when contractionary demand-side policy is applied?

Real output decreases as the AD curve shifts leftward along the AS curve.

How does contractionary monetary or fiscal policy affect the price level, as shown on an AD/AS diagram?

The price level falls as the leftward shift in AD moves the economy to a new equilibrium at a lower point on the AS curve.

Explain the mechanism by which contractionary fiscal policy reduces aggregate demand.

Contractionary fiscal policy involves raising taxes or cutting government spending, which reduces disposable income and/or government expenditure, leading to lower consumption and investment, shifting AD to the left.

What would happen to an economy experiencing demand-pull inflation if the central bank implemented contractionary monetary policy?

The leftward shift in AD would reduce the price level (or slow inflation) and decrease real output, helping to control the inflationary pressure.

Edexcel A-Level Economics A 9EC0

The Nature of Economics

Topic overview Economics as a social science Positive and normative economic statements The economic problem What a production possibility frontier shows Shifts in the PPF, and capital against consumer goods The division of labour and its advantages Specialisation for trade between countries The four functions of money Free market, command and mixed economies The advantages and disadvantages of the free market Command and mixed economies assessed

How Markets Work

Topic overview Rational decision making Demand Price, income and cross elasticity: formulae and values Interpreting income and cross elasticity of demand What determines the elasticity of demand Using elasticities: taxes, subsidies and business planning Elasticity and total revenue Supply Price elasticity of supply and its values What determines elasticity of supply, and the short and long run Price determination Price mechanism Consumer and producer surplus Indirect taxes and the incidence of a tax Subsidies and how their benefit is shared Alternative views of consumer behaviour

Market Failure

Topic overview What market failure is, and social costs and benefits Externality diagrams and welfare loss Correcting externalities, and who they affect Public goods Information gaps

Government Intervention

Topic overview Indirect taxes and subsidies as interventions Maximum and minimum prices, and tradable pollution permits State provision, regulation and government failure Government failure

Measures of Economic Performance

Topic overview Measuring growth: real GDP, GDP per capita and GNI Purchasing power parity and the limitations of GDP National wellbeing and the Easterlin paradox Inflation, deflation and how the CPI measures them The limitations of the CPI, and the RPI Demand-pull, cost-push and monetary causes of inflation The effects of inflation Measuring employment, unemployment and inactivity The causes of unemployment, migration and skills The effects of unemployment The components of the current account Current account deficits, surpluses and global imbalances

Aggregate Demand

Topic overview The components of aggregate demand The AD curve: why it slopes down and what shifts it Consumption (C)Investment (I)Government expenditure (G)Net trade (X-M)

Aggregate Supply

Topic overview The characteristics of AS Short-run AS Keynesian and classical views of the LRAS curve What shifts long-run aggregate supply

National Income

Topic overview The circular flow of income The distinction between income and wealth Injections, withdrawals and the equilibrium condition What counts as an injection and a withdrawal Macroeconomic equilibrium and shifts in AD and AS The shape of AS, demand-pull inflation and stagflation The multiplier process Marginal propensities to consume, save, tax and import Calculating the multiplier and why its size matters

Economic Growth

Topic overview What causes economic growth Actual against potential growth, and export-led growth Trend growth and positive and negative output gaps Identifying an output gap on an AD/AS diagram The four phases of the trade cycle, and the boom Recession, recovery and the output gap The impact of economic growth

Macroeconomic Objectives and Policies

Topic overview Possible macroeconomic objectives Monetary policy: interest rates and quantitative easing Fiscal policy: spending, taxation and the budget Demand-side policy on an AD/AS diagram The Bank of England, and policy in the 1930s and 2008 The strengths and weaknesses of demand-side policy Market-based and interventionist supply-side policies Labour market, skills and infrastructure policies The strengths and weaknesses of supply-side policy Conflicts between growth, inflation and the current account The Phillips curve and the trade-offs in a policy mix

Business Growth

Topic overview Why firms stay small and why they grow The principal-agent problem and types of organisation Organic growth and the types of integration Vertical and horizontal integration assessed Conglomerate integration and the constraints on growth Demergers

Business Objectives

Topic overview Profit, revenue and sales maximisation, and satisficing Business objectives on a cost and revenue diagram

Revenues, Costs and Profits

Topic overview Total, average and marginal revenue Revenue, elasticity and the revenue-maximising output Total, fixed, variable, average and marginal cost Why short-run cost curves take their shape The long-run average cost curve and returns to scale Types of economies and diseconomies of scale Internal and external economies of scale Normal profit, supernormal profit and losses The short-run and long-run shut-down points

Market Structures

Topic overview Efficiency The assumptions of perfect competition and its revenue curves Perfect competition: equilibrium and efficiency The characteristics of monopolistic competition Monopolistic competition: short-run and long-run equilibrium Excess capacity and efficiency in monopolistic competition The characteristics of oligopoly and concentration ratios Collusive and non-collusive behaviour Game theory, price and non-price competition The characteristics of monopoly and its equilibrium Third degree price discrimination The costs and benefits of monopoly, and natural monopoly What monopsony is and where its power comes from The costs and benefits of monopsony Contestable markets and hit-and-run competition Barriers to entry and exit Sunk costs and the degree of contestability

The Labour Market

Topic overview Demand for labour What determines the supply of labour Geographical and occupational immobility of labour Wage determination in competitive and monopsony markets Current issues in the UK labour market Minimum and maximum wages, and public sector pay The elasticity of demand for and supply of labour

Government Intervention in Markets

Topic overview Controlling mergers, and price, profit and quality regulation Deregulation, tendering, privatisation and nationalisation The impact of government intervention

International Economics

Topic overview What globalisation is and what has driven it The winners and losers from globalisation Absolute and comparative advantage The assumptions and limitations of comparative advantage The gains and costs of international specialisation Pattern of trade Terms of trade Types of trading bloc and the hierarchy of integration Trade creation, trade diversion and the costs of trading blocs The World Trade Organisation Why governments restrict trade, and the instruments used The effects of protectionism Balance of payments in a global context Exchange rate systems, and appreciation against revaluation What moves a floating rate, and how governments intervene The Marshall-Lerner condition and the J-curve effect Measuring competitiveness: unit labour costs and export prices What determines competitiveness, and the cost of losing it

Poverty and Inequality

Topic overview Absolute and relative poverty Measuring inequality: the Lorenz curve and Gini coefficient The causes of inequality, and capitalism's part in it

Emerging and Developing Economies

Topic overview The Human Development Index and its three dimensions The limits of the HDI, and other development indicators Primary product dependency, the savings gap and Harrod-Domar Population, debt, financial exclusion and infrastructure Governance, corruption, conflict and geography Market-orientated strategies: trade liberalisation and FDI Interventionist strategies: human capital and protectionism Infrastructure, joint ventures and buffer stock schemes The Lewis model, tourism, primary industries and Fairtrade Aid, debt relief, the World Bank, the IMF and NGOs

The Financial Sector

Topic overview Role of financial markets Asymmetric information, externalities and systemic risk Moral hazard, speculation, bubbles and market rigging Role of central banks

The Role of the State in the Macroeconomy

Topic overview Capital, current and transfer spending, and what drives it The effects of public expenditure, and crowding out Progressive, proportional and regressive taxes The Laffer curve and the effects of tax changes Automatic stabilisers, deficits and the national debt What drives deficits and debt, and why their size matters Reducing fiscal deficits and national debt Policies to reduce poverty and inequality Monetary, exchange rate and supply-side policy across countries Direct controls, and why policy works differently elsewhere What an external shock is, and the kinds that occur Fiscal, monetary and supply-side responses to a shock Policy lags and the constraints on responding Measures to control global companies' (transnationals') operations Problems facing policymakers when applying policies

Macroeconomic Objectives and Policies

Demand-side policy on an AD/AS diagram

3 things to know
Papers 2 and 3

Overview

Recall questions on how expansionary and contractionary policy move the AD curve, and how the shape of AS decides the outcome.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Process

How does the shape of the aggregate supply curve affect the outcome of demand-side policies?

Key term

What happens to the aggregate demand curve and the economy when expansionary monetary or fiscal policy is implemented?

Key term

What happens to the aggregate demand curve when contractionary monetary or fiscal policy is implemented?

Questions from this subtopic

Each one with the model answer underneath.

1
What happens to the aggregate demand curve and the economy when expansionary monetary or fiscal policy is implemented?
Model answer
The aggregate demand curve shifts to the right, increasing real output and the price level.
2
What happens to the aggregate demand curve when contractionary monetary or fiscal policy is implemented?
Model answer
The aggregate demand curve shifts to the left.
3
On an AD/AS diagram, what is the effect on real output when contractionary demand-side policy is applied?
Model answer
Real output decreases as the AD curve shifts leftward along the AS curve.
4
How does contractionary monetary or fiscal policy affect the price level, as shown on an AD/AS diagram?
Model answer
The price level falls as the leftward shift in AD moves the economy to a new equilibrium at a lower point on the AS curve.
5
Explain the mechanism by which contractionary fiscal policy reduces aggregate demand.
Model answer
Contractionary fiscal policy involves raising taxes or cutting government spending, which reduces disposable income and/or government expenditure, leading to lower consumption and investment, shifting AD to the left.
6
What would happen to an economy experiencing demand-pull inflation if the central bank implemented contractionary monetary policy?
Model answer
The leftward shift in AD would reduce the price level (or slow inflation) and decrease real output, helping to control the inflationary pressure.

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