Using a diagram, explain the significance for an economy of the interaction of aggregate demand and aggregate supply.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2018). The mark or mark type is shown in brackets.

1. [1] A correctly labelled diagram showing aggregate demand (AD) and aggregate supply (AS) curves.
2. [1] The diagram correctly shows equilibrium at the intersection of AD and AS.
3. [Up to 3] Using the diagram, explain how changes in aggregate demand (increase or decrease) impact prices, employment, and real output, determined by interaction with the AS curve.
4. [Up to 3] Using the diagram, explain how changes in aggregate supply (increase or decrease) impact prices, employment, and real output, determined by interaction with the AD curve.
5. [Up to 4] Analysis of any causes of an increase in aggregate supply (e.g., advances in technology, improved education/training, net immigration, net investment, discovery of new resources, lower production costs, reduction in regulations).
6. [Up to 4] Analysis of the costs and benefits of an increase in aggregate supply (Benefits: rise in standard of living, more leisure time, new products, lower inflation, economic growth. Costs: potential structural unemployment, depletion of resources).
7. [Up to 4] Evaluative judgement on the overall benefits, considering factors like the existence of a deflationary gap or short-run vs. long-run effects.
8. [1] A reasoned conclusion.