Macroeconomics
Macroeconomics tests measurement (GDP, unemployment, inflation), the aggregate demand–aggregate supply model, and stabilization through fiscal and monetary policy, including multipliers and money creation.
Core rules
- GDP = C + I + G + (X - M): the market value of final goods and services produced within a country in a period. It excludes intermediate goods, transfer payments, secondhand sales, and purely financial transactions. Real GDP uses base-year prices; GDP deflator = nominal GDP / real GDP x 100.
- Unemployment rate = unemployed / labor force x 100. The labor force excludes discouraged workers. Frictional plus structural unemployment equals the natural rate; cyclical unemployment tracks recessions.
- CPI = basket cost / base-year basket cost x 100; inflation = (CPI this year - CPI last year) / CPI last year. Unanticipated inflation helps borrowers and hurts lenders.
- AD slopes downward through wealth, interest-rate, and net-export effects. SRAS slopes upward; LRAS is vertical at potential output. Demand shocks move output and prices together; supply shocks move them in opposite directions.
- Expansionary fiscal policy raises G or cuts T. Spending multiplier = 1/(1 - MPC); tax multiplier = -MPC/(1 - MPC). Crowding out shrinks the effect.
- Fed tools: open-market operations, discount rate, reserve requirements, interest on reserves. Money multiplier = 1/reserve ratio; buying securities expands reserves.
Worked example
MPC = 0.8, so the spending multiplier is 1/0.2 = 5. An economy is $200 billion below potential. A $40 billion rise in G yields 40 x 5 = $200 billion and closes the gap. A $50 billion tax cut yields 50 x 4 = $200 billion, because the tax multiplier is -0.8/0.2 = -4.
Traps
Counting transfers or intermediate goods in GDP; treating discouraged workers as unemployed; shifting LRAS when AD changes; confusing the money multiplier with the spending multiplier; treating Fed bond sales as expansionary.