# Macroeconomics

> IB Economics SL · IB SL Economics
> Source: https://www.owlsprep.com/study/ib-economics-sl-u3-overview/
> Weight: 30% of overall IB Economics SL exam

This unit explores the behavior of the entire aggregate economy, covering core performance measures, key macroeconomic relationships, government policy tools, and the drivers of long-term economic growth.

**Prerequisites:** [Unit 2: Microeconomics fundamentals](https://www.owlsprep.com/study/ib-economics-sl-u2-overview/)

## Learning objectives

- Explain how national economic activity is measured and what key metrics reveal about an economy's performance
- Apply the aggregate demand-aggregate supply (AD-AS) model to explain macroeconomic equilibrium and business cycle fluctuations
- Analyze the causes and consequences of core macroeconomic problems: unemployment, inflation, and income inequality
- Evaluate the use of fiscal, monetary, and supply-side policies to achieve key macroeconomic objectives
- Explain the sources and socio-economic impacts of long-run economic growth

## Unit at a Glance

Macroeconomics examines big-picture issues that affect entire economies: rising prices, joblessness, slow growth, and inequality. It builds on microeconomic foundations to analyze how individual decisions aggregate to economy-wide outcomes, and how policymakers can address common macroeconomic problems.

The unit follows a logical learning sequence: we start by learning how to measure aggregate economic output, build the core AD-AS model to explain how the economy works, analyze key macroeconomic problems, evaluate different policy tools to address these problems, and end with a discussion of long-run economic growth.

Below are the 9 linked sub-topics of this unit, ordered for sequential learning:
- [Measuring economic activity](https://www.owlsprep.com/study/ib-economics-sl-u3-measuring-economic-activity/) — Learn to calculate GDP, distinguish nominal vs real GDP, and evaluate the limitations of GDP as a welfare measure.
- [Aggregate demand](https://www.owlsprep.com/study/ib-economics-sl-u3-aggregate-demand/) — Break down the components of aggregate demand and explain factors that shift the AD curve.
- [Aggregate supply](https://www.owlsprep.com/study/ib-economics-sl-u3-aggregate-supply/) — Distinguish between short-run and long-run aggregate supply and explain what causes shifts in AS.
- [Macroeconomic equilibrium](https://www.owlsprep.com/study/ib-economics-sl-u3-macroeconomic-equilibrium/) — Explain short-run and long-run equilibrium and how economic shocks change output and price levels.
- [Unemployment and inflation](https://www.owlsprep.com/study/ib-economics-sl-u3-unemployment-and-inflation/) — Analyze types, causes and consequences of unemployment and inflation, including the Phillips curve.
- [Income distribution and equity](https://www.owlsprep.com/study/ib-economics-sl-u3-income-distribution-and-equity/) — Examine measures of income inequality and the government's role in promoting more equitable outcomes.
- [Fiscal and monetary policy](https://www.owlsprep.com/study/ib-economics-sl-u3-fiscal-and-monetary-policy/) — Explore how governments and central banks use demand-side policies to meet macroeconomic objectives.
- [Supply-side policies](https://www.owlsprep.com/study/ib-economics-sl-u3-supply-side-policies/) — Evaluate different supply-side policies designed to increase an economy's potential output.
- [Economic growth](https://www.owlsprep.com/study/ib-economics-sl-u3-economic-growth/) — Explain the sources of long-run economic growth and key costs and benefits of growth.

## Common pitfalls

- **Wrong:** Confusing short-run and long-run aggregate supply when analyzing policy impacts
  - Why it fails: This leads to incorrect predictions about how policy affects output and prices in the long run, costing exam marks
  - Correct: Always label whether you are working with short-run (sticky wages/prices) or long-run (fully flexible prices) AS when answering questions
- **Wrong:** Mixing up fiscal and monetary policy tools and governing bodies
  - Why it fails: IB exam questions regularly test classification of policies, so mislabeling leads to avoidable lost marks
  - Correct: Remember: Fiscal policy (taxes/spending) is set by governments; Monetary policy (interest rates/money supply) is set by central banks
- **Wrong:** Treating GDP as a perfect measure of living standards
  - Why it fails: Most evaluation questions on GDP expect recognition of its limitations to earn full marks
  - Correct: Always mention key limitations (unpaid work, inequality, externalities) when evaluating GDP as a welfare measure

## Cheatsheet

| Key Concept / Formula | Core Use |
| --- | --- |
| $GDP = C + I + G + (X - M)$ | Expenditure method calculation of gross domestic product |
| Real GDP = $\frac{\text{Nominal GDP}}{\text{GDP Deflator} / 100}$ | Adjust nominal output for inflation to compare output across time |
| AD = $C + I + G + (X - M)$ | Total aggregate demand for all goods and services in an economy |
| SRAS: upward sloping; LRAS: vertical at potential output | Core AS shapes reflecting sticky vs fully flexible prices/wages |
| Unemployment Rate = $\left(\frac{\text{Unemployed}}{\text{Labor Force}}\right) \times 100\%$ | Standard measure of economy-wide unemployment |
| Inflation Rate = $\left(\frac{\text{CPI}_2 - \text{CPI}_1}{\text{CPI}_1}\right) \times 100\%$ | Percentage change in the average price level over time |
| Lorenz Curve / Gini Coefficient | Standard tools to measure the degree of income inequality in an economy |
| Expansionary policy → shifts AD right; Contractionary → shifts AD left | Core rule for demand-side policy impacts in the AD-AS model |
| Long-run economic growth → shifts LRAS rightward | Growth of potential output is represented as a right shift in long-run aggregate supply |

## What's next

Begin your sequential learning of this unit with the first sub-topic on measuring economic activity, which builds the foundational vocabulary and metrics you will use for all subsequent macroeconomic models and analysis. Once you complete all sub-topics in this unit, you will move on to the next unit covering international economics, which builds on the macroeconomic fundamentals you learn here.

- [Measuring economic activity](https://www.owlsprep.com/study/ib-economics-sl-u3-measuring-economic-activity/)
- [Aggregate demand](https://www.owlsprep.com/study/ib-economics-sl-u3-aggregate-demand/)

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