I85PREP
⌘ K
GCE A/L Economics study materials
GCE A/L Economics study resources

GCE A/L Economics: The Macroeconomy: National Income, Money and Banking, Inflation and Unemployment

GCE A/L Economics · Work through your exam, one topic at a time.

All guide sections

The Macroeconomy: National Income, Money and Banking, Inflation and Unemployment

Domain 5 tests national income measurement, the money supply and banking system, and the causes and costs of inflation and unemployment - usually combined in one data-response question.

Core rules

  • GDP is output produced within a country's borders; GNI adds net factor income from abroad. Real GDP is nominal GDP adjusted by the GDP deflator (deflator = nominal ÷ real × 100).
  • Output, income and expenditure methods should agree in the circular flow. Count value added only; exclude transfer payments and second-hand sales.
  • The multiplier k = 1 ÷ (1 − MPC) = 1 ÷ (MPS + MPT + MPM).
  • Money's functions: medium of exchange, unit of account, store of value, means of deferred payment. Credit creation: total deposits = initial deposit × 1 ÷ reserve ratio.
  • Inflation: demand-pull, cost-push, imported; measured by the CPI. Costs include menu costs, uncertainty reducing investment, redistribution from savers to borrowers, and falling real incomes.
  • Unemployment types: frictional, structural, cyclical, seasonal, real-wage. Costs: lost output, benefit spending, lost tax revenue, hysteresis.

Worked example

MPC = 0.8, so k = 1 ÷ (1 − 0.8) = 5. A government injection of 50 million raises national income by 50 × 5 = 250 million, provided there is spare capacity and no crowding out.

Traps

Using nominal GDP to compare living standards across years; adding transfer payments to GDP; assuming inflation harms everyone (borrowers on fixed-rate debt gain); confusing a fall in the inflation rate with deflation.