Syllabus: AQA AS Economics
Module: The National Economy in a Global Context
Lesson: 3.2.2 How the Macroeconomy Works: Circular Flow, AD/AS Analysis, Related Concepts

Introduction

This unit, part of the AQA AS Economics syllabus (Section 3.2.2), delves into the structure and dynamics of the macroeconomy. Students explore the circular flow of income, the critical Aggregate Demand (AD) and Aggregate Supply (AS) model, and broader concepts like economic shocks and the multiplier effect​. Mastering these ideas helps students connect theory to real-world economies and sharpen their skills for interpreting economic change.

Key Concepts

• Circular Flow of Income: Students learn how income moves between households, firms, the government, and the international sector, including injections and leakages.

• Aggregate Demand (AD): Definition, components (C + I + G + (X-M)), and factors causing shifts.

• Aggregate Supply (AS): Differences between short-run and long-run AS, and factors affecting each.

• Macroeconomic Equilibrium: How the interaction of AD and AS determines national output, price level, and employment levels.

• The Multiplier Effect: Understanding how an initial change in spending leads to a larger overall impact on national income.

• Economic Shocks: Positive and negative shocks and their short-term and long-term impacts on the economy.

• The Business Cycle: Phases of economic growth and recession, linked to shifts in AD and AS​.

Real-World Relevance

The circular flow model underpinned government decision-making during COVID-19 when furlough schemes aimed to sustain household income and business activity. More recently, the UK’s post-Brexit trade patterns offer a live case study for AD shifts, particularly around net exports (X-M). Meanwhile, supply chain disruptions caused by global conflicts illustrate shifts in Aggregate Supply, affecting inflation and real GDP growth.

Mini case study: In 2022, the spike in global oil prices created cost-push inflation across many economies, including the UK, visibly shifting the short-run AS curve leftward.

How It’s Assessed

Assessment follows the AQA AS Paper 2 structure​:

• Short-Answer and Data-Response Questions: Often requiring diagrammatic analysis (e.g., drawing and interpreting shifts in AD/AS curves).

• Extended Essays: These demand critical analysis and evaluation, usually linked to policy options following a macroeconomic shock.

• Command Words: “Explain”, “Analyse”, and “Evaluate” are key. Students should be familiar with their specific AQA definitions and expectations​.

Typical questions include:

• “With the aid of an AD/AS diagram, explain how a fall in consumer confidence might affect real GDP.”

• “Evaluate the possible effects of an increase in government spending on the level of employment.”

Enterprise Skills Integration

• Problem-Solving: Students work through how different policies (e.g., fiscal stimulus) affect AD/AS.

• Decision-Making: Through case studies, they assess the impact of different macroeconomic strategies.

• Analytical Thinking: Students interpret data trends (e.g., inflation rates, GDP growth) and link them to shifts in AD or AS.

Tools like Enterprise Skills’ MarketScope AI can be plugged into lessons here, helping students quickly analyse real-world economic data without adding prep workload​.

Careers Links

Understanding the macroeconomy builds a foundation for a range of careers linked to Gatsby Benchmarks 4, 5, and 6​:

• Economist or Policy Advisor: Interpreting data to advise on fiscal and monetary policy.

• Financial Analyst: Predicting impacts of economic shifts on investment markets.

• Business Journalist: Explaining complex economic concepts to the public.

• Civil Service Roles: Particularly in departments like HM Treasury or the Bank of England.

These careers demand the ability to connect models like the AD/AS framework to real-world trends.

Teaching Notes

• Tips: Emphasise diagram work early. Students often understand concepts like shifts in AD and AS better when they can visualise them clearly.

• Common Pitfalls: Confusing movements along curves with shifts. Reinforce the conditions causing shifts versus movements.

• Extension Activities: Use real-world data (ONS GDP updates, inflation figures) for live AD/AS diagram practice. Students can sketch the likely shifts and predict outcomes.

• Optional Stretch: Introduce open economy models by discussing how international trade and exchange rates further complicate the circular flow and AD/AS dynamics.