Macroeconomics
Macroeconomics tests aggregate measurement, short-run fluctuations, inflation and unemployment, and the logic of fiscal and monetary stabilization. The exam expects you to move between national-accounts identities, the AD–AS model, and simple multiplier arithmetic without confusing nominal and real magnitudes.
Core rules and concepts
- Expenditure identity: Y = C + I + G + NX. GDP counts final goods and services produced domestically; transfer payments and intermediate goods are excluded.
- Nominal versus real: the GDP deflator is nominal GDP divided by real GDP times 100. Real variables are nominal values deflated by a price index.
- Unemployment: the rate is unemployed divided by the labour force. Discouraged workers who stop searching leave the labour force, so the measured rate can fall while job prospects worsen.
- AD–AS: demand shocks move output and prices in the short run when supply slopes upward; supply shocks move prices and output in opposite directions.
- Multiplier with a proportional tax rate t: 1/[1 − c(1 − t)], where c is the marginal propensity to consume. Crowding out reduces the net output effect.
- Phillips curve: a short-run inflation–unemployment trade-off exists, but expectations shift the curve; Okun's law links output gaps and unemployment gaps.
Worked example
Suppose c = 0.8 and t = 0.25. The multiplier is 1/[1 − 0.8(0.75)] = 1/0.4 = 2.5. An autonomous investment increase of 40 raises equilibrium output by 40 × 2.5 = 100. If the output gap is 100, this closes it. If crowding out cuts investment by 10, net autonomous spending rises by 30, so output rises by 75 and a gap of 25 remains. The reasoning matters: apply the multiplier to the net autonomous change, not to the gross policy announcement.
Traps that cost marks
Do not count transfer payments in GDP, and do not compare nominal GDP across years without deflating. The GDP deflator and CPI use different baskets. A fall in the unemployment rate may reflect discouraged workers leaving the labour force. Potential output is not the same as actual output, and the multiplier is smaller when taxes, imports, or crowding out are present.