Unit Overview

Macroeconomics

IB Economics HL· 6 min read 📊 25-30% of overall IB Economics HL exam

1. Unit at a Glance

Macroeconomics studies the big picture of the entire national economy, rather than individual consumer and firm behavior. We start by defining the core objectives governments aim to achieve, then build the foundational aggregate demand-aggregate supply (AD-AS) model that underpins all macroeconomic analysis.

After exploring equilibrium and key outcomes (economic growth, unemployment, inflation), we examine how different types of policy are used to meet macroeconomic objectives, before turning to HL-only topics including the Phillips curve, quantitative analysis, and policy trade-off evaluation.

This unit includes the following core and HL-only sub-topics:

Macroeconomic objectives

Learn the four core macroeconomic objectives and how they are measured.

★⏱ 5 min

Aggregate demand

Understand the components of aggregate demand and factors that shift the AD curve.

★★⏱ 6 min

Aggregate supply

Distinguish between short-run and long-run aggregate supply and their shift determinants.

★★⏱ 6 min

Macroeconomic equilibrium

Explore how AD and AS interact to determine equilibrium output and price levels.

★★⏱ 7 min

Economic growth

Analyze the causes, benefits and costs of long-run and short-run economic growth.

★★⏱ 6 min

Unemployment and employment

Examine types, causes and consequences of unemployment for the economy.

★★⏱ 6 min

Inflation and deflation

Understand the causes, types and impacts of sustained changes in the general price level.

★★⏱ 7 min

Fiscal policy

Learn how governments use spending and taxation to influence macroeconomic outcomes.

★★★⏱ 7 min

Monetary policy

Explore how central banks adjust interest rates and the money supply to meet policy goals.

★★★⏱ 7 min

Supply-side policies

Examine policies designed to increase the long-run productive capacity of the economy.

★★★⏱ 7 min

Income and wealth inequality

Analyze the causes, consequences and policies to address income and wealth disparities.

★★★⏱ 8 min

Phillips curve (HL only)

Explore the short-run and long-run relationship between inflation and unemployment.

★★★★⏱ 6 min

Macroeconomics quantitative analysis (HL only)

Calculate key macro indicators, multiplier effects, and the impact of AD/AS shifts.

★★★★⏱ 8 min

Policy trade-offs and evaluation (HL only)

Evaluate conflicting objectives and compare the effectiveness of different policy types.

★★★★⏱ 9 min

2. Common Pitfalls

Wrong move:

Confusing short-run (SRAS) and long-run (LRAS) aggregate supply curves

Why:

Mixing up SRAS and LRAS leads to incorrect analysis of how economic shocks impact output and prices

Correct move:

Remember LRAS is vertical at potential output, while SRAS is upward-sloping due to sticky wages and prices in the short run

Wrong move:

Treating all policies as purely demand-side or purely supply-side

Why:

Most policies impact both aggregate demand and aggregate supply, leading to incomplete evaluation

Correct move:

Always consider both demand-side and supply-side effects when evaluating the impact of any policy

Wrong move:

Confusing a one-time relative price increase with inflation

Why:

Inflation is a sustained increase in the general price level, not just a price rise for a single good

Correct move:

Use the definition of ongoing growth in the overall price level to correctly identify inflation

3. Quick Reference Cheatsheet

Concept/Formula	Description
$A D = C + I + G + (X - M)$	Aggregate demand equals the sum of consumption, investment, government spending, and net exports
LRAS = Potential output ( $Y_{p}$ )	Long-run aggregate supply is fixed at the economy's maximum sustainable output
Growth rate = $\frac{G D P _{n e w} - G D P _{o l d}}{G D P _{o l d}} \times 100$	Percentage change in real GDP measures annual economic growth
Unemployment rate = $\frac{U n e m pl oy e d}{L ab or f or ce} \times 100$	Standard calculation of unemployment as a share of the active labor force
Inflation rate = $\frac{C P I _{n e w} - C P I _{o l d}}{C P I _{o l d}} \times 100$	Percentage change in the consumer price index measures inflation
Budget balance = $T - G$	Difference between government tax revenue and spending for fiscal policy
Short-run Phillips curve = Inverse inflation-unemployment trade-off	Short-run trade-off that disappears in the long-run at the natural rate of unemployment
Spending multiplier = $\frac{1}{1 - M P C}$	HL-only formula for the total impact of a spending change on aggregate output

What's Next

Start this unit by learning the core macroeconomic objectives that all government policy aims to achieve. Once you complete all sub-topics in this unit, you will move on to Unit 4: International Economics, which applies macroeconomic principles to cross-border trade and finance.