Analysing Macroeconomics Diagrams | A-Level Economics
The diagrams showing shifts in Aggregate Demand (AD) and Aggregate Supply (AS) are fundamental to A-Level Macroeconomics. While the diagrams themselves are often simple, achieving top marks requires you to add a detailed chain of reasoning to explain the full impact of any shift.
This guide provides the exact chains of analysis that examiners are looking for when you are describing a change in Real GDP (Y) or the Price Level (PL).
Analysing a Change in Real GDP (Y)
When Real GDP Increases (e.g. from Y1 to Y2)
- this shows an increase in real gdp
- total value of goods and services produced in the economy has increased
- firms will increase their demand for workers to meet the extra output which they are aiming to produce
- unemployment will fall
- more people having a job will lead to an improvement in living standards
When Real GDP Decreases (e.g. from Y1 to Y2)
- this shows an decrease in real gdp
- total value of goods and services produced in the economy has decreased
- firms will decrease their demand for workers as there is less output that is being produced
- unemployment will increase
- which will lead to a decline in living standards
Analysing a Change in the Price Level (PL)
When the Price Level Increases (e.g., from PL1 to PL2)
- there is an increase in the average price level
- increase in the rate of inflation
- high inflation (above 2% target) can be damaging
- as wages do not increase as frequently as increases in prices
- disposable incomes will fall if people continue to spend as normal
- living standards will fall
- workers may as for higher wages
- firms can increase wages and then increase prices more
- or offer higher wages and layoff some workers, causing unemployment
When the Price Level Decreases (e.g., from PL1 to a new PL2)
- there is a decrease in the average price level
- this would be seen as deflation or disinflation depending on the state of the economy
- deflation can be damaging
- this is bad as
- consumers will delay spending as they expect lower prices in the future
- and also because the value of money is increasing so people hold on to it
- lower consumer spending can lead to further decreases in AD
- leading to further deflation and also unemployment
Further Support
These model paragraphs and chains of reasonings provide a foundation for writing A-Level Economics essays. For personalised feedback on your own essays or for extra help understanding content, we welcome your enquiries regarding A-Level Economics tutoring.