Unit 4 Diagram Bank — Must-Know Macro Diagrams for the Exam
Every macroeconomic diagram you need for the Unit 4 examination, in one place. For each one: what it shows, how to draw it, and the point examiners most want to see. Cover the caption and try to reproduce each diagram from memory.
1. The multiplier process
An initial injection of spending sets off successive rounds of induced consumption. Each round is smaller because some income leaks to saving, so the total rise in output is a multiple of the original injection.
Show the initial injection, then shrinking successive rounds, summing to the final change in output. The multiplier k = 1 ÷ (1 − MPC) = 1 ÷ MPS.
2. The AD/AS model
Aggregate demand slopes down, short-run aggregate supply slopes up, and their intersection sets the price level and real output together. A demand shift moves both.
Axes are price level (vertical) and real GDP (horizontal). Shift AD right (e.g. AD → AD₂) and read the new equilibrium: higher price level and higher output.
3. Expansionary fiscal policy
A higher G or lower T raises aggregate demand, shifting AD right toward the vertical LRAS and closing a recessionary output gap.
Draw AD, SRAS and a vertical LRAS. An expansionary stance shifts AD right; mark the recessionary gap closing and the rise in output.
4. Monetary transmission mechanism
A cash-rate change does not affect the economy directly — it works through channels (lending rates, the exchange rate, asset prices/wealth, household cash flow) that together move aggregate demand.
Draw the flow: cash rate → the four channels → C, I and net exports → aggregate demand → output, employment and inflation.
5. Long-run growth (LRAS shift)
A rise in labour productivity raises potential output, shifting the vertical LRAS to the right. With AD unchanged, output rises and the price level eases — non-inflationary growth.
Draw a vertical LRAS and shift it right to LRAS₂. The new equilibrium sits at higher output and a lower price level.