WEC12 Macroeconomic performance and policy

Lessons in WEC12

1. Aggregate demand
   AD = C + I + G + (X - M). Changes in components shift AD; a change in the price level moves along it.
2. Economic growth: GDP, GNI, real and nominal
   Growth = % change in real GDP. GNI = GDP + net income from abroad. Real = nominal x 100 / price index. Per capita = total / population.
3. Comparing growth: PPPs, negative growth and recession
   Compare real, per capita, PPP-adjusted figures. A slower growth rate is still growth. Recession = two consecutive quarters of negative growth.
4. GDP, living standards and national wellbeing
   GDP misses distribution, the hidden economy, unpaid work, leisure, environment and quality. Wellbeing surveys measure happiness directly; extra income matters l
5. Measuring inflation: the CPI and index numbers
   Inflation, deflation (negative), disinflation (slower positive). Weighted CPI = sum(weight x index) / sum(weights). % change = (new - old)/old x 100; index poin
6. Causes of inflation and deflation
   Demand-pull: AD shifts right (P and Y up). Cost-push: SRAS shifts left (P up, Y down). Money supply: MV = PY. Deflation: AD left (bad) or AS right (benign) or l
7. Effects of inflation and deflation
   Inflation: savers, fixed-income earners and lenders lose; borrowers gain; uncertainty cuts investment; higher relative inflation hurts competitiveness and the c
8. Measuring employment and unemployment
   ILO unemployed: no job, sought work in the last 4 weeks, can start within 2 weeks. Unemployment rate = unemployed / (employed + unemployed). Watch inactivity an
9. Causes and effects of unemployment
   Frictional (between jobs), seasonal, structural (mismatch), demand deficient (low AD), real wage (wage above equilibrium). Effects: lost output inside the PPF,
10. The balance of payments and the current account
    Current account = goods + services + primary income + secondary income. Trade balance = goods + services. A deficit must be financed by net inflows on the finan
11. Consumption and the savings ratio
    C depends on disposable income, interest rates, confidence, benefits, wealth and credit. Yd = C + S. Savings ratio = S / Yd x 100; a rise cuts AD in the short r
12. Investment
    Net investment = gross - depreciation. I depends on growth (accelerator), interest rates, confidence, credit and profit tax. It raises AD now and LRAS later.
13. Government spending and net trade
    G: fiscal policy, economic activity, market failures, politics (transfers excluded). X - M: real incomes, exchange rate, world economy, protectionism, non-price
14. Aggregate supply and short-run AS
    SRAS slopes up. Price level changes move along it; costs (raw materials, energy, exchange rate, taxes, wages) shift it.
15. Long-run AS: Keynesian and classical views
    Classical LRAS: vertical at full employment. Keynesian AS: horizontal, then curving, then vertical. LRAS shifts with technology, productivity, skills, regulatio
16. The circular flow, injections and withdrawals
    Injections: I, G, X. Withdrawals: S, T, M. J > W, income rises; W > J, income falls; equilibrium where J = W. Income is a flow, wealth a stock.
17. Equilibrium real output and AD/AS shifts
    Equilibrium where AD = AS. AD right: P and Y up. SRAS left: P up, Y down. AS right: P down, Y up. Two shifts at once: one variable certain, the other depends on
18. The multiplier
    Multiplier = 1 / (1 - MPC) = 1 / MPW, MPW = MPS + MPT + MPM. Change in Y = multiplier x change in injection. It works in both directions.
19. Causes of economic growth
    Actual growth: real GDP rises (AD). Potential growth: capacity rises (LRAS/PPF out) via investment, FDI, innovation, labour force, competition. Productivity = o
20. Benefits and costs of economic growth
    Benefits: living standards, jobs, profits, investment, tax revenue, public services. Costs: opportunity cost, environment, trade deficits, inequality, inflation
21. Output gaps
    Output gap = (actual - potential) / potential x 100. Negative: spare capacity, low inflation, high unemployment. Positive: overheating, inflation. Potential is
22. Macroeconomic objectives
    Objectives: growth, low stable inflation, low unemployment, current account equilibrium, balanced budget, greater income equality.
23. Conflicts between objectives and the Phillips curve
    Short-run Phillips curve: inverse link between inflation and unemployment. Other conflicts: growth versus environment, inflation versus current account, growth
24. Supply-side policies
    Supply-side: raise productivity, competition, incentives; LRAS right. Free market: deregulation, privatisation, tax cuts, benefit changes, less red tape. Interv
25. Demand-side policy: fiscal policy
    Fiscal: G and T, set by government. Reflationary raises AD; deflationary reduces it. Strengths: targeted, direct, automatic stabilisers. Weaknesses: time lags,
26. Monetary policy and the role of central banks
    Instruments: interest rates, QE, lending criteria, reserve requirements. Central bank: monetary policy, inflation target, banker to government, banker to banks
27. Unit 2 exam technique (WEC12)
    Section A 6 x 1; B 5 x 4; C data response 2/4/6/8/14; D one 20-mark essay. Define precisely, label diagrams, use the context, chain your reasoning and judge.

Next exams for WEC12

• January 2027: Wed 13 Jan 2027, morning, 1h 45m
• Summer 2027: Wed 12 May 2027, morning, 1h 45m

From Pearson's final timetables. All exam dates. Always confirm your entries with your exams officer.