3 Macroeconomics

Macroeconomics studies the economy as a whole: its total output and income, the general level of prices, the number of people in work, and how income is distributed. It asks why these totals change over time and what governments and central banks can do to make the economy more stable, more prosperous and fairer.

The questions that frame macroeconomics

The unit is built around two real-world questions. The first is why economic activity varies over time, and why this matters. Output grows in most years but sometimes falls; unemployment, inflation and inequality rise and fall with it. These changes come from both the demand side and the supply side of the economy, they affect people’s economic well-being, and economists in different schools of thought disagree about their causes.

The second question is how governments manage the economy, and how effective their policies are. Governments aim for steady growth, low unemployment, low and stable inflation and a fair distribution of income. They use monetary, fiscal and supply-side policies to pursue these aims, but every policy works with time lags and side effects, and political, social and environmental factors limit what any policy can achieve.

The subtopics

How the subtopics connect

The unit follows a logical sequence: measure, explain, judge and then act. The measures of national income (gross domestic product, real GDP, the business cycle) describe what is happening. The aggregate demand and aggregate supply model explains why output and the price level change. The objectives of economic growth, low unemployment, low and stable inflation, and a fairer distribution of income set the standards against which performance is judged. The three types of policy are the tools governments use to move the economy towards those objectives.

The AD/AS diagram is the central diagram of the unit. Almost every later idea is drawn on it: a recession as a fall in AD, cost-push inflation as a fall in short-run aggregate supply, expansionary monetary policy and fiscal policy as rightward shifts of AD, and supply-side policies as rightward shifts of long-run aggregate supply. The debate between Keynesian and monetarist/new classical economists, introduced as part of the history of economic thought, returns here as two different views of how the economy adjusts and how much governments should intervene.

One economy through the whole unit: Australia

Australia’s recent experience touches almost every subtopic. Between 1992 and 2019 its real GDP rose every year, an unusually long run without an annual fall in output. In 2020 the COVID-19 pandemic ended that run: real GDP fell by 2.0%, and unemployment rose to 6.5%.

The chart shows how the macroeconomic objectives moved together. Strong demand after the pandemic and higher world energy and food prices pushed inflation to 6.6% in 2022, far above the Reserve Bank of Australia’s inflation target. The Reserve Bank raised its cash rate from 0.10% in May 2022 to 4.35% by November 2023 in thirteen steps, and inflation fell back to 2.8% by 2025 while growth slowed to 1.0% in 2024. The rate was cut three times in 2025, then raised again in four steps during 2026, reaching 4.60% at the end of September 2026.

The episode raises the unit’s main questions: how to measure the 2020 contraction (3.1), what shifted AD and aggregate supply (3.2), whether low unemployment and low inflation conflict (3.3), who bore the cost of higher prices and interest rates (3.4), and how monetary, fiscal and supply-side policies (3.5–3.7) can be combined.

Sources: IMF, World Economic Outlook, via DataMapper, series NGDP_RPCH, PCPIPCH and LUR (2026); Reserve Bank of Australia, cash rate target history (2026).

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Key concepts in macroeconomics

Several key concepts carry most of the weight in macroeconomics:

• Economic well-being. Growth in real income per person raises living standards, but GDP leaves out much of what makes people better off, and unemployment and inflation impose real costs on households.

• Change. The business cycle, shifts in aggregate demand and supply, and long-term growth are all about how the economy changes over time.

• Intervention. Monetary, fiscal and supply-side policies are forms of intervention, and the Keynesian and monetarist/new classical views disagree about how much of it the economy needs.

• Equity. Inequality and poverty, and the use of taxes and transfers to reduce them, raise questions of fairness.

• Sustainability. High growth can conflict with protecting the environment, and high government debt can burden future generations.

Choice and interdependence run through the unit too: every policy involves a trade-off between objectives, and a recession or an interest rate decision in one large economy spreads to its trading partners.

How SL and HL differ

Unit 3 has no HL-only subtopics: SL and HL students study all seven subtopics. HL students study extensions within four of them, most of which are calculations or additional diagrams, and HL teaching time for the unit is longer to allow for this.

HL Paper 3 can set questions on any macroeconomic content. Typical items include calculating the Keynesian multiplier and the change in real GDP it implies, a weighted price index, total and average tax paid from a tax schedule, and the SL calculations of real GDP, growth, inflation and unemployment rates, followed by a policy recommendation, for example on reducing unemployment or inflation.

Assessment

Macroeconomics is examined in every external paper:

• Paper 1 (SL and HL): students answer one extended-response question from a choice of three, which can include macroeconomic questions, for example on the causes of inflation or the effectiveness of a policy. HL questions can include HL extension material such as the Phillips curve or crowding out.

• Paper 2 (SL and HL): data-response questions often include macroeconomic parts, such as calculating real GDP, growth, inflation or unemployment rates, drawing AD/AS diagrams, and evaluating a government’s policies using the text. Paper 2 does not include HL-only material.

• Paper 3 (HL only): the policy paper can use any macroeconomic content, including HL calculations, and asks for a recommended policy supported by the data.

One of the three commentaries in the internal assessment portfolio must be based on a news article linked to macroeconomics, such as a central bank’s interest rate decision, a government budget or a report on unemployment or inflation.