How the macroeconomy works: the circular flow of income and AD/AS analysis

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• identifies that MPS is the withdrawal ratio associated with savings, the proportion of extra income households save rather than spend.1 mark
• states the multiplier formula, k = 1 / (1 - MPC), equivalent to k = 1 / MPW (marginal propensity to withdraw).1 mark
• explains that a higher MPS raises total withdrawals (MPW) at each round of extra income.1 mark
• explains that this means less of each extra pound of income is re-spent (recirculated) in the domestic economy at each successive round.1 mark
• correctly links a higher MPW (the denominator of the multiplier formula) to a smaller multiplier value.1 mark
• draws the overall conclusion that a given injection now generates a smaller final rise in national income than before.1 mark

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Tick each line you got. Your score builds from the marks on the scheme.

• a basic, undeveloped point, e.g. states that G is a component/injection of AD, so a rise in G increases AD, with limited or no diagram or analysis.3 marks
• explains the chain, G is a component of AD so AD shifts right from AD1 to AD2, at the intersection with SRAS both the price level and real output rise, with reference to the multiplier effect and a diagram used with some accuracy.3 marks
• fully develops the chain of analysis with an accurate AD/AS diagram (correctly shows the AD shift and the resulting change in price level and output), includes a clear explanation of the multiplier (the initial injection creating successive rounds of re-spending), and begins to evaluate, e.g. that the outcome depends on how much spare capacity exists in the economy.3 marks
• as Level 3, with sustained, well-supported evaluation on at least two of: the size of the multiplier and the marginal propensity to withdraw; spare capacity relative to full employment (near LRAS means mostly rising prices, spare capacity means more real output); crowding out if the spending is financed by borrowing; the time lag before spending affects output; leading to a supported overall judgement.3 marks
• Content that earns credit: AD = C + I + G + (X - M) and a rightward shift from a rise in G; the AD1-to-AD2 diagram intersecting SRAS at a higher price level and higher real output; the multiplier process, where the initial spending becomes income that is partly re-spent in further rounds; evaluation via spare capacity versus proximity to LRAS; the Keynesian LRAS shape, where a rise in AD in the horizontal section raises output with no price change; crowding out, where government borrowing can raise interest rates and displace private investment and consumption; the size of the multiplier, which depends on the marginal propensity to consume domestically (a high MPM or MPS gives a small multiplier).3 marks

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