Economics 9708 · syllabus 9

Cambridge A Level Economics 9708 — The macroeconomy (A Level) topical past papers

The circular flow and the multiplier, growth, cycles and sustainability, the natural rate of unemployment, and how money, banks and interest rates work.

Questions: 1,165
Years: 2002–2026
With mark scheme: 100%
Questions 2022–2026: 316

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What The macroeconomy (A Level) covers

In an open economy with a government, income is withdrawn from the circular flow as saving, taxes and spending on imports, and injected as investment, government spending and exports. National income is in equilibrium when withdrawals equal injections. A change in an injection has a multiplied effect on income, because each round of spending becomes someone else's income, part of which is spent again: the multiplier is one divided by the marginal propensity to withdraw, the sum of the marginal propensities to save, to pay tax and to import.

Growth can come from using spare capacity, which closes a negative output gap, or from raising potential output with more capital, a better-trained workforce and new technology. It is uneven: economies move through a cycle of boom, downturn, recession and recovery. Growth raises living standards and tax revenue, but it can use up resources, harm the environment and widen inequality, which raises the question of whether it is sustainable, meeting present needs without compromising those of future generations. The natural rate of unemployment is what remains when the labour market is in equilibrium, made up of frictional and structural unemployment, and policies to cut unemployment must match its cause.

Money is whatever is generally accepted in payment; it serves as a medium of exchange, a unit of account, a store of value and a standard of deferred payment. Commercial banks create credit: their loans become new deposits, limited by the liquid reserves they keep. The quantity theory of money, MV = PT, implies that if velocity and the volume of transactions are stable, a rise in the money supply raises the price level. Interest rates are explained in two ways: by liquidity preference, where the demand for money for transactions, precautionary and speculative motives meets the money supply, and by loanable funds, where the supply of saving meets the demand for borrowing. This is A Level content, examined on Papers 3 and 4.

In the syllabus

The headings this topic has in the Cambridge International 2026–2028 syllabus, as the board prints them.

9 The macroeconomy (A Level)
9.1 The circular flow of income
9.2 Economic growth and sustainability
9.3 Employment/unemployment
9.4 Money and banking

Read the syllabus on the board’s website

What you should be able to do

Explain equilibrium national income in an open economy with a government, using injections and withdrawals
Calculate the multiplier from the marginal propensities, and the final change in income from a change in an injection
Distinguish actual from potential growth, explain output gaps and the economic cycle, and evaluate the costs and benefits of growth
Explain what makes growth sustainable, and what the natural rate of unemployment is
Describe the functions and characteristics of money, and explain how commercial banks create credit
Use the quantity theory of money, and explain interest rate determination by liquidity preference and by loanable funds

Key ideas

Equilibrium: withdrawals (S + T + M) = injections (I + G + X)
Multiplier k = 1 ÷ MPW, where MPW = MPS + MPT + MPM; with no government or trade, k = 1 ÷ MPS = 1 ÷ (1 − MPC)
Change in national income = multiplier × change in injections
Quantity theory: MV = PT, with M the money supply, V the velocity of circulation, P the price level and T the volume of transactions
Credit multiplier = 1 ÷ reserve ratio, the largest increase in deposits that each unit of new reserves can support
Liquidity preference: the demand for money rises as the interest rate falls, and with the money supply drawn as a vertical line, an increase in it lowers the interest rate

How The macroeconomy (A Level) has been examined

From 2022 to 2026, The macroeconomy (A Level) was on Paper 4 · A Level Data Response and Essays in 10 of 14 exam series, worth about 20% of that paper’s marks.

How The macroeconomy (A Level) has been examined, by paper
Paper	Questions	Share of marks	Series
Paper 3 · A Level Multiple Choice	279	27%	14 of 14
Paper 4 · A Level Data Response and Essays	37	20%	10 of 14

Momentum’s own count, over the questions in its bank for these years: a series is one exam session, every zone included, and a question filed under two chapters counts in both. Median marks per question: 1. The bank files this topic together with neighbouring ones, so these figures count every question in its chapters, including some on those topics.

Filed in Momentum under: The Macro Economy.

A worked example

In an economy, the marginal propensity to save is 0.1, the marginal propensity to pay tax 0.2 and the marginal propensity to import 0.2, all out of gross income. Government spending on infrastructure rises by $40 billion. Calculate the multiplier and the eventual change in national income, and check that the economy returns to equilibrium.

Marginal propensity to withdraw: MPW = 0.1 + 0.2 + 0.2 = 0.5
Multiplier: k = 1 ÷ MPW = 1 ÷ 0.5 = 2
Change in national income: ΔY = k × ΔG = 2 × $40 billion = $80 billion
In rounds: the first $40 billion of income leads to $20 billion of spending on domestic output, then $10 billion, $5 billion and so on, and 40 + 20 + 10 + 5 + … = 80
Check: withdrawals rise by 0.5 × $80 billion = $40 billion, equal to the extra injection, so withdrawals and injections are equal again

Answer: The multiplier is 2, and national income eventually rises by $80 billion

Written by Momentum for this page, with its own numbers; it is not taken from a past paper.

Mistakes that cost marks

Using the marginal propensity to save alone in an open economy with a government — taxes and imports are withdrawals too, so the multiplier is 1 ÷ (MPS + MPT + MPM), smaller than 1 ÷ MPS
Adding the initial injection again after applying the multiplier — the multiplier already gives the final change in income, first round included
Treating MV = PT as proof that money causes inflation — the equation is true by definition; the claim that more money raises prices depends on assuming V and T are stable
Equating the natural rate of unemployment with zero unemployment — frictional and structural unemployment remain even when the labour market clears
Assuming banks can lend only what savers have deposited, so the money supply cannot grow — loans create new deposits elsewhere in the system, so deposits can grow to a multiple of reserves

Exam technique

In Paper 3 multiplier questions, find the marginal propensity to withdraw first, then the multiplier, then the change in income; a common distractor uses an average propensity instead of a marginal one
Before analysing a change in spending, place the economy in the cycle: the same rise in AD closes a negative output gap but widens a positive one, adding to inflation
When a data-response question gives figures for the money supply, interest rates or growth, describe the relationship over time and consider what else could explain it, such as a change in velocity or in confidence
In essays on the causes of inflation, set out the assumptions behind each view and evaluate them with evidence: velocity is not always stable, and with spare capacity more money can raise output rather than prices

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