Explain the possible impact of an increase in wealth and consumer confidence on aggregate demand.

Examine why, in contrast to the monetarist/new classical model, the economy will not automatically return to the full employment level of output in the Keynesian model.

Answers may include:

• definitions of wealth, consumer confidence, aggregate demand (AD)
• diagram(s) to show AD shifting to the right
• explanation of the possible impact of an increase in wealth and consumer confidence on AD
• examples of increases in wealth and consumer confidence.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of full employment level of output, Keynesian model, monetarist/new classical model
• diagram(s) to show equilibrium in the two models
• explanation of the mechanisms through which an economy may remain stuck in a deflationary gap in the Keynesian system but will always return to full employment equilibrium in the monetarist/new classical model in the long run
• examples of the two models applying in practice
• synthesis or evaluation (examine).

Evaluation may include: the importance of the type of unemployment, the degree to which both models represent extreme theoretical ends of a spectrum, the degree to which reality deviates from the models, the difficulty of establishing what is full employment, policy implications.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Opinions or conclusions should be presented clearly and should be supported by appropriate examples.

Marks should be allocated according to the Paper 1 markbands for May 2013 forward, part B.