Macroeconomics: Accounting, Stabilization and Growth
Macroeconomics tests your command of aggregate accounting, short-run stabilization models, long-run growth, and open-economy linkages. Expect numerical multiplier or growth questions plus short analytical prompts asking you to evaluate a policy rule or an empirical claim.
Core rules
- National accounts: Y = C + I + G + NX. In a closed economy with taxes, disposable income is Y − T and the multiplier is 1/(1 − c(1 − t)) when tax is proportional.
- Short run: IS–LM and AD–AS link interest rates, output and prices. Monetary policy shifts AD; supply shocks move SRAS and create a stagflation trade-off.
- Phillips curve: π = πᵉ − β(u − uₙ) + shock. Only unanticipated policy moves output if expectations are rational and credible.
- Growth: in Solow, capital deepening has diminishing returns; long-run per-capita growth comes from technology. Golden-rule saving maximizes steady-state consumption.
- Open economy: uncovered interest parity i = i* + expected depreciation; PPP is a long-run anchor, not a short-run law.
Worked example
C = 100 + 0.8Yd, I = 150, G = 200, T = 100, closed economy. Y = 100 + 0.8(Y − 100) + 150 + 200 = 370 + 0.8Y, so 0.2Y = 370 and Y = 1850. The multiplier is 5. A tax cut of 50 raises Y by 0.8 × 5 × 50 = 200, not 250, because the first round of a tax cut is partly saved.
Traps
- Mixing nominal and real magnitudes, or quoting a growth rate without a base.
- Treating the deficit as the debt, or assuming a balanced budget is automatically contractionary.
- Ignoring crowding out when G rises with a steep LM curve.
- Applying short-run multipliers to the long run, where output is supply-determined.