Which way does the aggregate demand curve shift when income tax is cut, and why?

It shifts to the right, because households keep more of their income and plan to spend more at every price level.

Why does the effect of a rightward shift in aggregate demand depend on the slope of aggregate supply?

Where aggregate supply is flat the extra demand is met almost entirely by higher output, whereas where it is steep or vertical the extra demand is absorbed almost entirely by higher prices.

Why does contractionary monetary policy shift aggregate demand to the left?

Higher interest rates cut consumption and investment and tend to appreciate the currency, which reduces net exports, so planned spending falls at every price level.

Edexcel A-Level Economics B 9EB0

Scarcity, Choice and Potential Conflicts

Topic overview Scarcity and the economic problem Choice, trade-offs and opportunity cost Profit maximisation, sales maximisation and satisficing Survival, market share and other business objectives Stakeholders and their objectives Stakeholder conflicts and corporate social responsibility

Enterprise, Business and the Economy

Topic overview The entrepreneur and creative destruction Adding value Entrepreneurial motives Factors of production Division of labour and specialisation The wider economic environment and the firm

Introducing the Market

Topic overview Consumer objectives and the demand curve Movements along and shifts of the demand curve Producer objectives and the supply curve Movements along and shifts of the supply curve Equilibrium price and quantity Excess demand, excess supply and market forces Shifts in demand and supply in real markets Limitations of the supply and demand model Functions of the price mechanism Mass markets, niche markets and market growth Market research and consumer insight Market segmentation Market mapping and competitive advantage Adding value, pricing decisions and dynamic markets

The Role of Credit in the Economy

Topic overview Banks and the channelling of savings into investment Bank lending, interest rates and collateral Risk in business decision-making Limited and unlimited liability Loans, overdrafts and trade credit Venture capital, share capital and leasing Owner's capital, retained profit and other sources of finance Challenges in obtaining credit and the impact of credit on the economy

Market Failure and Government Intervention

Topic overview Private, external and social costs Private, external and social benefits Externalities in production and consumption Strengths and weaknesses of the market economy The purpose and methods of government intervention Government failure

Revenue, Costs, Profits and Cash

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Business Growth and Competitive Advantage

Topic overview Objectives of business growth Internal and external economies of scale Diseconomies of scale and the problems of growth Corporate culture in a growing business Organic and inorganic growth Horizontal, vertical and conglomerate integration Innovation, research and development and competitive advantage State funding for research and development The product life cycle and extension strategies Market information in the digital economy Digital technology and the supply side of business The long tail and wider geographical markets Costs, prices and firm survival in a digital market How small firms compete

Firms, Consumers and Elasticities of Demand

Topic overview Calculating and interpreting price elasticity of demand Factors influencing price elasticity of demand Price elasticity of demand and total revenue Price elasticity of demand in niche and mass markets Pricing strategies Choosing the right pricing strategy Online sales, price comparison and pricing decisions Non-price competition and the demand curve Devising a marketing approach Income elasticity of demand

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Life in a Global Economy

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The Economic Cycle

Topic overview The economic cycle: boom, slowdown, recession and recovery Implications of the economic cycle for firms The circular flow of income, injections and withdrawals Aggregate demand and its components Aggregate supply, input costs and productivity Inflation, deflation and disinflation Price indices and the rate of inflation Real and nominal values, constant and current prices Demand-pull and cost-push inflation The impact of inflation on firms and individuals Employment, underemployment and the measurement of unemployment The causes of unemployment The impact of unemployment on firms and individuals

Introduction to Macroeconomic Policy

Topic overview The main macroeconomic objectives Fiscal policy Monetary policy and interest rates Supply-side policies Exchange rate policy under a floating rate Conflicts between macroeconomic objectives Choosing policy instruments and their unintended consequences

Globalisation

Topic overview The growing economic power of China and India Africa and other emerging markets Rising incomes, firms and shifting employment patterns Nominal and real values Index numbers Trade liberalisation and economic growth Specialisation and comparative advantage Foreign direct investment and growth Trade creation and trade diversion Trading blocs and the single market Trading blocs, firms and growing interdependence Protectionism: tariffs, quotas and other trade barriers Trade negotiations and international institutions Exchange rate changes and the Eurozone

Economic Factors in Business Expansion

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Impact of Globalisation on Global Companies

Topic overview Globalisation and glocalisation Ethnocentric, polycentric and geocentric approaches to global markets Price and non-price competition in global markets Branding and differentiation in global markets Cultural and language barriers in global markets Adapting marketing strategy for niche and mass markets

Impact of Globalisation on Local and National Economies

Topic overview Multinational corporations and local labour markets Multinational corporations and local firms Multinationals, the local community and the environment Foreign direct investment, growth and the balance of payments Technology transfer, skills and business culture Multinationals and consumers Tax revenues and transfer pricing Stakeholder conflicts, pay and working conditions Emissions, waste disposal and supply chain ethics Ethical marketing: labelling and promotion Controlling multinational corporations

Global Labour Markets

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Inequality and Re-Distribution

Topic overview Absolute and relative poverty and how they are measured Measuring inequality: the Lorenz curve and the Gini coefficient Reducing poverty: growth, development and international aid The impact of inequality on individuals, firms and the economy Re-distribution of income and wealth through taxation and services

Competition and Market Power

Topic overview Market structures across the spectrum of competition Perfect competition and what the model explains Market structure, pricing strategies and consumers Non-price competition and the limitations of perfect competition Contestability, ease of entry and barriers to entry Barriers to entry, market structure and economies of scale Concentration ratios, interdependence and tacit agreement Price discrimination Average and marginal cost, revenue and profit Contribution, business objectives and pricing strategies Productive and allocative efficiency Productivity, market orientation and interrelated markets

Market Power and Market Failure

Topic overview Cartels, collusion and restrictive practices Monopsony, natural monopoly and power in the labour market The implications of market failure for firms, consumers and government Promoting competition: anti-competitive practices, mergers and privatisation Regulating natural monopolies and protecting consumers and employees The Competition and Markets Authority and EU competition policy The benefits and costs of regulation

Market Failure Across the Economy

Topic overview Merit and demerit goods Factor immobility and information failure Externalities and social costs and benefits Environmental externalities and environmental change Policies to correct market failure

Macroeconomic Policies and Impact on Firms and Individuals

Topic overview Aggregate demand and its components Aggregate supply, full capacity output and the output gap The multiplier effect Shifts in AD and AS: inflation, unemployment and growth Fiscal policy: government spending and taxation Monetary policy: the Bank of England, interest rates and quantitative easing Demand-side policies on the AD/AS diagram: investment, jobs and prices Time lags, policy conflicts and the limits of demand-side policy Market-based supply-side policies Interventionist supply-side policies Supply-side policies on the AD/AS diagram: strengths and weaknesses Comparing macroeconomic policies and judging their success

Risk and the Financial Sector

Topic overview Risk and uncertainty in business decisions Economic shocks and their impact on firms Exchange rate risk and forward markets Insurance and the management of business risk Mobilising savings and lending for business investment Assessing creditor risk and lending to individuals Payments, equity markets and the exchange of goods and services The central bank: the MPC, monetary policy and financial regulation The Global Financial Crisis and banking regulation

Macroeconomic Policies and Impact on Firms and Individuals

Demand-side policies on the AD/AS diagram: investment, jobs and prices

3 things to know
Papers 1 and 3

Overview

Income tax cuts and the aggregate demand curve, expansionary policy in a deep recession and at full capacity, the inflationary cost of demand-side policy and the slope of aggregate supply, contractionary monetary policy, a positive output gap, encouraging business investment, capital allowances, macroeconomic stability, job creation, cost-push inflation, anchored expectations, and rate cuts in deep recessions.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Describe what an AD/AS diagram shows when expansionary policy is used in a deep recession.

Key term

Describe what an AD/AS diagram shows when expansionary policy is used at full capacity.

Key term

On an AD/AS diagram, what shows the inflationary cost of a demand-side policy?

Questions from this subtopic

Each one with the model answer underneath.

1
Which way does the aggregate demand curve shift when income tax is cut, and why?
Model answer
It shifts to the right, because households keep more of their income and plan to spend more at every price level.
2
Describe what an AD/AS diagram shows when expansionary policy is used in a deep recession.
Model answer
Aggregate demand shifts right along a relatively flat section of aggregate supply, so real output rises substantially while the price level rises very little.
3
Describe what an AD/AS diagram shows when expansionary policy is used at full capacity.
Model answer
Aggregate demand shifts right against a vertical long-run aggregate supply curve, so the price level rises and real output is unchanged.
4
On an AD/AS diagram, what shows the inflationary cost of a demand-side policy?
Model answer
The rise in the equilibrium price level between the old and the new intersection of aggregate demand and aggregate supply.
5
Why does the effect of a rightward shift in aggregate demand depend on the slope of aggregate supply?
Model answer
Where aggregate supply is flat the extra demand is met almost entirely by higher output, whereas where it is steep or vertical the extra demand is absorbed almost entirely by higher prices.
6
Why does contractionary monetary policy shift aggregate demand to the left?
Model answer
Higher interest rates cut consumption and investment and tend to appreciate the currency, which reduces net exports, so planned spending falls at every price level.

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Scarcity, Choice and Potential Conflicts

Enterprise, Business and the Economy

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The Role of Credit in the Economy

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ABorrowing becomes dearer and saving more rewarding.

BMortgage holders have less disposable income left.

CSpending on credit-financed items falls.

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