Topic 4 of 6 · Form 5
The macroeconomy and government macro policy
GDP, GNI, NNI; nominal and real; per capita; the circular flow; aggregate demand (C + I + G + X − M) and aggregate supply (short and long run); macroeconomic equilibrium.
Notes for this topic 1 file, in order
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National income
GDP, GNI, NNI; nominal and real; per capita; the circular flow; aggregate demand (C + I + G + X − M) and aggregate supply (short and long run); macroeconomic equilibrium.
The multiplier and accelerator
k = 1 ÷ MPW (marginal propensity to withdraw = MPS + MPT + MPM).
Worked example: MPS = 0.1, MPT = 0.2 and MPM = 0.2. Investment rises by US$100 million. Find the change in national income.
k = 1 ÷ 0.5 = 2 → ΔY = US$200 million
Inflation and unemployment
Measurement (CPI, labour force surveys); causes and consequences; the Phillips curve (short and long run).
Money and banking
Money supply, credit creation, central banks; quantity theory MV = PT; liquidity preference and interest rates.
Policies
Fiscal (automatic stabilisers, discretionary), monetary (interest rates, quantitative easing), supply-side; policy conflicts and trade-offs; effectiveness and time lags.
Check yourself
- What is an automatic stabiliser?
- State the quantity theory of money.
- What does the long-run Phillips curve suggest?
Show answers
- A feature (e.g. progressive tax, benefits) that changes automatically with the economy to reduce fluctuations.
- MV = PT (money supply × velocity = price level × transactions).
- There is no trade-off between inflation and unemployment in the long run (vertical at the natural rate).
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