Macroeconomics: National Income, AD/AS, Policy, Inflation and Unemployment
What the exam tests
National income, AD/AS, fiscal and monetary policy, inflation and unemployment. You must distinguish injections and leaks, nominal and real values, demand-pull and cost-push inflation, and evaluate policy using multipliers, time lags and supply-side effects.
Core rules
- GDP measures domestic output; GNI adds net factor income from abroad. Real GDP uses constant prices. Transfer payments are not in GDP because no output is produced.
- AD = C + I + G + (X - M). SRAS slopes up because of sticky costs; LRAS is vertical at potential output in the neoclassical model, but Keynesian LRAS may have a flat section.
- The multiplier k = 1/(1 - MPC) = 1/(MPS + MPT + MPM). An output gap is the difference between actual and potential GDP.
- Fiscal policy changes G and T; monetary policy changes interest rates, money supply or quantitative easing. Both have lags and may crowd out private spending.
- Demand-pull inflation arises from AD growth; cost-push from input costs. Unemployment includes frictional, structural, seasonal and cyclical types.
Worked example
MPC = 0.8, so k = 5. A $40bn increase in government spending raises equilibrium GDP by up to $200bn if there is spare capacity. If the economy is already at potential output, the same injection mainly raises the price level rather than real output. Evaluation should note leakages through imports and taxes, implementation lags, and whether the spending is on infrastructure with supply-side benefits.
Traps
Do not count pensions or unemployment benefits as GDP. Do not confuse the budget deficit with the national debt. Do not say inflation always hurts everyone: borrowers with fixed-rate debt may gain, and asset holders may benefit. Do not treat a fall in unemployment as proof of falling underemployment or inactivity.