Macroeconomics: National Accounts, Multipliers and Policy
The Macroeconomics domain tests national-account arithmetic, the construction of equilibrium output, and the direction and size of policy effects. The exam favours the Keynesian cross with a government sector, the AD–AS model, the multiplier family, and short questions on inflation, unemployment and the open economy.
Core rules
- GDP is the market value of final goods and services produced inside the country during a period. It excludes intermediate goods, pure transfers, second-hand sales (only the dealer's margin counts) and financial transactions.
- Expenditure identity: Y = C + I + G + NX. Disposable income: Yd = Y − T + TR, with T usually a function of Y, e.g. T = tY.
- Real versus nominal: deflator = nominal/real × 100. The CPI uses a fixed basket and therefore overstates inflation through substitution bias.
- Spending multiplier with a proportional tax: 1/(1 − c(1 − t)). Adding imports m gives 1/(1 − c(1 − t) + m). The tax multiplier −c/(1 − c(1 − t)) is smaller in absolute value.
- Short-run Phillips curve trades inflation against unemployment; the long-run curve is vertical at the natural rate.
- Crowding out, the liquidity trap and automatic stabilisers explain why the simple multiplier overstates the effect of fiscal policy.
Worked example
C = 100 + 0.8Yd, T = 0.25Y, I = 200, G = 300, closed economy. Then Y = 100 + 0.8(0.75Y) + 500 = 600 + 0.6Y, so 0.4Y = 600 and Y* = 1500. Check: Yd = 1125, C = 1000, and 1000 + 200 + 300 = 1500. The government-spending multiplier is 1/0.4 = 2.5, so ΔG = 40 raises Y by 100. The budget balance is T − G = 375 − 300 = 75, a surplus.
Traps that cost marks
Adding transfer payments or intermediate purchases to GDP; double counting; using nominal GDP when comparing growth across years; confusing the deficit with the debt; assuming the tax multiplier equals the spending multiplier; confusing a rise in the price level with inflation; and forgetting that the unemployment rate excludes discouraged workers. In open-economy questions, keep the interest-parity sign convention consistent.