(Macro) Economics Unit 2 Full Notes

Full notes that cover the entire specification for the Edexcel Unit 2 exam.

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Unit 2-Macroeconomics
The basic assumptions
In Macroeconomics it is key to keep these assumptions in our mind in order to explain what happens
in the economy:
Consumers are looking to maximise their utility (amount/quality of goods and services they get for
their money)
Producers are looking to maximise their profits
Economic transactions
It is also important to remember what
happens in any economic transactions. A
transaction always involves goods of some
kind and money of some kind. For example
when we, the consumers, buy a new car,
from the producers, we gain the good but
loose the money (or the producers loses the
good but gains the money).
In order for any good to be made, the
producer must fist but the factors of
production, they buy these factors from the
people that own them (factor owners) if we take an ungoverned economy this would be private
As an example in order to build the car the manufacturer must but buy the metal to make the car,
metal is a form of land (it's a natural resource) and so the manufacturer must pay rent for the metal.
The factor owner here (the guy that owns the metal) gain an income for the sale of their factors.
Land (natural resource) Rent
Labour (employees) Wages
Capital (man made goods) Interest
Enterprise (leadership) Profit
We could therefore say that for every pound spent this become some form on income to somebody,
it becomes wages, rent, interest or profit for someone in the economy. For example if we buy our
car for £100, this would be divided up between the various factor owners who together help build
the cars.
One man's spending is another man's income- Mr Priestley

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Circular flow of income and Aggregate Demand
-In an ungoverned, closed economy
In this model the only two entities are households and firms. Income will flow between these two
groups as shown in the diagram. On one side households buy goods and services, in return firms
receive the consumer expenditure. On the other side firms
buy the factors of production (in order to produce their
goods and services) at the cost of the factor income's
(wages, rent, interest, and profit).…read more

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The output gap
the difference between the actual level of national output and the estimated potential level. This
could be expressed as the difference between actual GDP and potential GDP (as GDP is a measure of
national output).
The output gap can be one of two things:
Negative output gap ­ downward pressure on inflation. If actual GDP is less than potential GDP
there is a negative output gap.…read more

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Money leaves the flow as a withdrawal (people saving). However if we go back to our basic
assumptions we can assume people will put the money with a financial institution (e.g. a bank) so that
they can earn interest on their money rather than it just loose value.…read more

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Governments (Governments can offer tax breaks for certain capital goods lowering the cost of I thus
more firms invest)
We assume firms want to maximise profits, therefore by investing into their business they expect a
retun on their investment. The rate of return of investment is known as marginal efficiency of capital
(MEC). For example if a firm plans to invest £4bn at an MEC of 20% then they will receive £0.8bn a
Equations for closed, ungoverned.…read more

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£100 was worth more a year ago than it is today). A rise in
inflation does more harm than good.
Expectations also effect C and S. If households believe income will rise in the future they
will feel safer borrowing, however if they believe economic conditions are going to get
worse they will cut consumption and save in order to prepare.
Age can effect Consumption and spending.…read more

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Td) and secondly they will tax
expenditure (Te). Both of these are forms of withdrawals (W).
Our equations-
We know that equilibrium occurs when W=J.…read more

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The multiplier effect
-the amount by which an initial injection is multiplied up
Investment if a form of spending. So we can assume when
firms invest someone's factor income rises. So as well as
the initial spending in the form of investment, we can
assume some of this additional income will be spent.
The effect this multiplier has depends on an individual's
MPC. The more an individual spends the bigger the
multiplier, for example if MPC was 0.…read more

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AS increases.…read more

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As a result we draw the long run
aggregate supply curve as vertical.
Improvements in productivity and efficiency cause the long-run aggregate supply curve to shift out
over the years.…read more


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