Macroeconomics: National Income, Inflation, Unemployment and Policy
What this domain tests
Macro asks you to measure national income, explain inflation and unemployment, and evaluate fiscal and monetary policy in an open, euro-area economy. You must distinguish real from nominal values and link policy to AD, AS and the labour market.
Core rules
- Expenditure identity: GDP = C + I + G + (X − M). GDP measures output produced within borders; GNI measures income earned by residents. Real GDP uses constant prices.
- GDP deflator = (nominal GDP / real GDP) × 100. Inflation is a sustained rise in the price level; Malta’s EU-comparable measure is HICP.
- Unemployment types: frictional, structural, cyclical and seasonal. The unemployment rate = unemployed / labour force × 100; full employment still involves frictional and structural unemployment.
- Demand-pull inflation comes from AD growth; cost-push from input costs or supply shocks. Short-run Phillips curve shows a trade-off; expectations can shift it.
- Fiscal policy changes G and T; expansionary policy raises AD but may crowd out private investment. Monetary policy changes interest rates and credit; in Malta the ECB sets the policy rate because Malta uses the euro.
- Automatic stabilisers cushion cycles without discretionary decisions.
Worked example
C = 80 + 0.75Yd, T = 20, I = 40, G = 30, X = 25, M = 15. Yd = Y − 20, so C = 80 + 0.75(Y − 20) = 65 + 0.75Y. AD = C + I + G + X − M = 65 + 0.75Y + 40 + 30 + 10 = 145 + 0.75Y. Equilibrium: Y = 145 + 0.75Y, so 0.25Y = 145 and Y = 580. The multiplier is 1/(1 − 0.75) = 4; a €10 rise in G raises equilibrium Y by €40, ignoring crowding out and supply constraints.
Traps
Do not count transfer payments in GDP. Do not call a rise in nominal GDP inflation without adjusting for output. Do not treat the unemployment rate as zero at full employment. Remember that euro-area monetary policy is not set by the Maltese government.