Economics Macroeconomics Syllabus

How is macroeconomic equilibrium determined?

Where aggregate demand equals aggregate supply, $AD = AS$. This determines the equilibrium real national output and the general price level, at the intersection of the AD and AS curves.

What is a deflationary (recessionary) gap?

When equilibrium real output is below the full-employment level of output, so there is spare capacity and unemployment. It reflects a deficiency of aggregate demand.

What is an inflationary gap?

When aggregate demand exceeds the full-employment level of output, so the economy is producing beyond sustainable capacity, causing demand-pull inflation.

State the multiplier formula in terms of the MPC and the marginal propensity to withdraw.

$$k = \frac{1}{1 - MPC} = \frac{1}{MPW}$$ where $MPW = MPS + MPT + MPM$ (withdrawals into saving, tax, and imports).

Explain the multiplier effect.

An initial change in injections (e.g. investment or government spending) leads to a larger final change in national income, because one person's spending becomes another's income, which is partly re-spent in successive rounds.

If the MPC is 0.75, what is the value of the multiplier?

$$k = \frac{1}{1 - 0.75} = \frac{1}{0.25} = 4$$ So a $\$1$ injection ultimately raises national income by $\$4$.

Explain the accelerator principle.

Investment depends on the rate of change of national income/output, not its absolute level. A rise in the growth of demand causes a proportionately larger rise in induced investment; even a slowing (but positive) growth in demand can cause investment to fall.

Define frictional unemployment.

Short-term unemployment arising as workers move between jobs (searching for or transitioning to a new job). It exists even in a healthy economy and is largely voluntary.

Define structural unemployment.

Long-term unemployment caused by a mismatch between workers' skills/location and the jobs available, due to changes in the structure of the economy (e.g. decline of an industry). It includes regional, sectoral, and technological unemployment.

Define cyclical (demand-deficient) unemployment.

Unemployment caused by a fall in aggregate demand during an economic downturn/recession, when firms produce and hire less. It is also called Keynesian unemployment.

What is the natural rate of unemployment?

The rate of unemployment that remains when the labour market is in equilibrium — the sum of frictional, structural, and seasonal (voluntary/supply-side) unemployment. There is no cyclical unemployment at the natural rate; it corresponds to full employment.

Name the two main methods of measuring unemployment.

The Claimant Count (counts those claiming unemployment-related benefits) and the Labour Force Survey / ILO measure (surveys people who are out of work, available to work, and actively seeking work in the last 4 weeks).

How is the unemployment rate calculated?

$$\text{Unemployment rate} = \frac{\text{Number unemployed}}{\text{Labour force}} \times 100\%$$ where the labour force = the employed plus the unemployed (economically active).

Define inflation, deflation, and disinflation.

Inflation is a sustained rise in the general price level (a fall in money's purchasing power). Deflation is a sustained fall in the general price level. Disinflation is a fall in the rate of inflation — prices still rise, but more slowly.

Distinguish demand-pull from cost-push inflation.

Demand-pull inflation results from excess aggregate demand ('too much money chasing too few goods'), shifting AD right. Cost-push inflation results from rising costs of production (e.g. wages, oil), shifting SRAS left.

State the Fisher equation of exchange (quantity theory of money).

$$MV = PQ$$ where $M$ = money supply, $V$ = velocity of circulation, $P$ = price level, $Q$ = real output. Monetarists assume $V$ and $Q$ are stable, so a rise in $M$ raises $P$.

How is the inflation rate measured using a price index (e.g. CPI)?

A representative 'basket' of goods and services is priced over time; the CPI tracks its cost. Inflation is the percentage change in the index: $$\pi = \frac{CPI_{t} - CPI_{t-1}}{CPI_{t-1}} \times 100\%$$

State two costs of deflation.

Consumers delay spending expecting lower future prices (falling AD); and the real value of debt rises, discouraging borrowing and investment — both can deepen a recession (a deflationary spiral).

What does the short-run Phillips curve show?

An inverse (trade-off) relationship between the rate of unemployment and the rate of inflation: lower unemployment is associated with higher inflation, and vice versa.

What does the long-run Phillips curve show, and what concept does it embody?

It is vertical at the natural rate of unemployment (NAIRU): there is no long-run trade-off between inflation and unemployment. Any attempt to hold unemployment below the natural rate only accelerates inflation as expectations adjust.

Distinguish direct taxes from indirect taxes with examples.

Direct taxes are levied on income or wealth and paid directly to the government (e.g. income tax, corporation tax). Indirect taxes are levied on spending/goods and services and collected via an intermediary (e.g. VAT, excise duties).

Distinguish progressive, proportional, and regressive taxes.

Progressive: the average tax rate rises as income rises (e.g. income tax with rising bands). Proportional: the average rate is constant across incomes (a flat tax). Regressive: the average rate falls as income rises (takes a larger share of low incomes, e.g. VAT).

Distinguish current government spending from capital government spending.

Current spending is on day-to-day running costs and recurring items (e.g. public-sector wages, medicines). Capital spending is investment in long-lasting assets/infrastructure (e.g. roads, schools, hospitals).

Define a budget deficit and a budget surplus.

A budget deficit occurs when government spending exceeds tax revenue in a period ($G > T$), requiring borrowing. A budget surplus occurs when tax revenue exceeds spending ($T > G$), allowing debt repayment. A balanced budget is $G = T$.

Distinguish a cyclical (fiscal) deficit from a structural deficit.

A cyclical deficit arises from the economic cycle — it grows in recessions (lower tax revenue, higher benefits) and shrinks in booms. A structural deficit persists even at full employment/trend output; it is not eliminated by economic recovery.

What is the national debt, and how does it relate to the budget deficit?

The national debt is the total accumulated stock of government borrowing outstanding. The budget deficit is a flow — the annual addition to the debt. Running deficits increases the national debt; surpluses reduce it.

Define automatic stabilisers and give two examples.

Automatic stabilisers are features of the fiscal system that automatically dampen the economic cycle without any deliberate government action. Examples: progressive income tax (revenue falls automatically in a downturn) and welfare/unemployment benefits (spending rises automatically in a downturn).

Distinguish discretionary fiscal policy from automatic stabilisers.

Discretionary fiscal policy involves deliberate government decisions to change spending or tax rates to influence AD. Automatic stabilisers work automatically through the existing tax-and-benefit system, requiring no new decision.

Distinguish expansionary from contractionary fiscal policy.

Expansionary fiscal policy raises AD by increasing government spending and/or cutting taxes (usually widening the deficit). Contractionary (deflationary) fiscal policy reduces AD by cutting spending and/or raising taxes (reducing the deficit).

How do central banks use interest rates to affect the money supply and economy?

By setting the base/policy rate. Raising it makes borrowing dearer and saving more attractive, reducing money growth and AD (tightening). Cutting it cheapens borrowing, boosting the money supply, spending and AD (loosening).

List the main functions of a central bank.

Conducting monetary policy (setting interest rates to hit the inflation target); acting as banker to the government; acting as lender of last resort to banks; issuing currency; and maintaining financial stability/regulating the banking system.

Explain what quantitative easing (QE) is and how it works.

QE is an unconventional monetary policy where the central bank creates new money electronically to buy financial assets (mainly government bonds) from banks and other institutions. This raises bond prices, lowers long-term yields, increases banks' reserves/liquidity, and aims to boost lending, asset prices, and aggregate demand — used when interest rates are already near zero.