● MACROECONOMICS
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MACROECONOMICSβ€ΊREVISIONβ€ΊQUICK REVISION

Quick Revision

Compressed revision cards for all three units. Use these after you already understand the concepts β€” for the night before, not instead of the unit pages.

UNIT 01 β€” Nature & Scope of Macroeconomics

Core idea: Macroeconomics studies the behaviour of the economic system in totality β€” a study of aggregates (total employment, national income, general price level).

Key points
  • Ackley: macro = aggregate output, employment, national income, general price level. Micro = division of output, allocation of resources, relative prices.
  • Origin: Great Depression 1929–33 (US unemployment β‰ˆ 25% of labour force). Classical Say's Law: supply creates its own demand. Keynes (1936) refuted it β†’ Keynesian Revolution.
  • Six issues: unemployment Β· recession & national income Β· inflation Β· business cycles Β· stagflation Β· economic growth. (+ balance of payments & exchange rate.)
  • Paradoxes: paradox of thrift; wage-employment paradox; both are cases of the fallacy of composition. Boulding's forest-and-trees analogy.
  • Role of government (3 levers): Fiscal (taxes & spending) Β· Monetary (money supply, credit, interest) Β· Supply-side (stimulate output, cure stagflation).
  • Business decisions: business environment = GDP trends, aggregate demand, saving/investment, price level, employment, international factors, government policy.
Exam keywords
study of aggregatesSay's LawKeynesian Revolutionparadox of thriftfallacy of compositionstagflationsupply-side policies

UNIT 02 β€” Circular Flow of Income

Core idea: Money flows in a circle between households and firms, opposite in direction to the real flow of goods and resources.

E = C + I + G  |  Y = C + S + T  β†’  I + G = S + T  β†’  G βˆ’ T = S βˆ’ I
Constant flow (4-sector): S + T + M = I + G + X
Key points
  • Leakages: Saving, Taxes, Imports. Injections: Investment, Government expenditure, Exports.
  • Two-sector constancy condition: planned S = planned I. Classicals said interest rate equalises them; Keynes denied it (savers β‰  investors).
  • Planned S and I can differ (cause of fluctuations); actual S ≑ actual I always (unsold output = inventory investment).
  • G > T β†’ budget deficit β†’ government borrows β†’ I < S β†’ crowding out of private investment.
  • National saving S = private saving (Yβˆ’Tβˆ’C) + public saving (Tβˆ’G).
  • X = M β†’ balance of trade; X > M β†’ trade surplus; M > X β†’ trade deficit.
Exam keywords
leakages & injectionscrowding outplanned vs actualfinancial marketfour-sector model

UNIT 02 β€” National Income

Core idea: National product = national income = national expenditure (Hicks). Three views of the same total.

GDP = C + I + G + NX  |  GNP = GDP + Net Factor Income from Abroad
NNP = GNP βˆ’ Depreciation  |  National Income = NNPFC
PI = NI βˆ’ SS contributions βˆ’ Corporate taxes βˆ’ Undistributed profits + Transfer payments
PDI = PI βˆ’ Personal taxes = Consumption + Saving
GNP Deflator = (Nominal GNP / Real GNP) Γ— 100
Key points
  • Three methods: Value Added (output) Β· Income Β· Expenditure.
  • Value-added chain: Value of output (= Sales + Ξ” Stocks) β†’ GVAMP (βˆ’ intermediate consumption) β†’ NVAMP (βˆ’ depreciation) β†’ NVAFC (βˆ’ net indirect taxes).
  • Only final goods counted β†’ avoids double counting. Second-hand sales excluded, but brokerage on them included.
  • Include imputed rent of self-occupied houses; exclude services of housewives.
  • NEW (Net Economic Welfare): ADD leisure + non-marketed services; DEDUCT pollution + "regrettable costs" (police, law courts, defence).
Exam keywords
double countingnet factor income from abroadfactor cost vs market priceGNP deflatorNet Economic Welfare

UNIT 02 β€” Consumption, Saving & Investment

C = a + bY  |  APC = C/Y  |  MPC = Ξ”C/Ξ”Y = b
S = Y βˆ’ C = βˆ’a + (1βˆ’b)Y  |  APS = S/Y  |  MPS = Ξ”S/Ξ”Y = 1βˆ’b
APC + APS = 1    MPC + MPS = 1    0 < MPC < 1
Key points
  • Keynes' law: as income rises consumption rises, but less than income.
  • In the linear Keynesian function: MPC constant, APC falls as Y rises β†’ therefore MPC < APC always.
  • As APC falls, APS rises with income.
  • Diagram: 45Β° line OZ. Below break-even income, C > Y β†’ dissaving. At OYβ‚€, C = Y. Beyond, the widening gap = saving.
  • MPC = 0 β†’ horizontal C curve; MPC = 1 β†’ C curve coincides with 45Β° line. Neither is realistic.
  • Investment depends on rate of interest + marginal efficiency of capital (MEC); inverse relation with r.
Exam keywords
C = a + bYAPC vs MPCdissavingbreak-even incomemarginal efficiency of capital

UNIT 02 β€” AD-AS and IS-LM

AD-AS
  • AD components: C + I + G + NX. AD slopes down because of three effects: wealth (real balance) Β· interest rate Β· net exports.
  • AS shapes: Classical = vertical at full employment Β· Keynes = horizontal then vertical Β· SAS = upward-sloping (sticky wages) Β· LAS = vertical at potential GDP.
  • With upward-sloping SAS, the multiplier effect on real GDP is smaller than with a fixed price level. Steeper SAS β†’ bigger price rise, smaller multiplier.
IS-LM
  • IS = goods market, slopes down (r ↓ β†’ I ↑ β†’ Y ↑). Shifts right with ↑G, ↑autonomous I, ↓T.
  • LM = money market, slopes up (Y ↑ β†’ transactions demand ↑ β†’ r ↑). Md = L(Y, r). Shifts right with ↑ real money supply.
  • Intersection determines Y and r simultaneously. Model due to Hicks (also Hansen, Lerner, Johnson).
  • Fiscal expansion β†’ IS right β†’ Y ↑ and r ↑ β†’ partial crowding out. Monetary expansion β†’ LM right β†’ r ↓, Y ↑.
  • LM ranges: horizontal Keynesian/liquidity-trap range (monetary policy ineffective, fiscal fully effective) Β· intermediate Β· vertical classical range (monetary effective, fiscal crowded out).
Exam keywords
wealth effectclassical dichotomysticky wagesIS downward LM upwardliquidity trap

UNIT 03 β€” Business Cycle

Core idea: Alternating periods of expansion and contraction around the long-run growth trend. Recurrent, but not perfectly regular (2 to 10–12 years).

Four phases
  • 1. Expansion / Prosperity β€” output & employment rise to full employment; only frictional & structural unemployment; potential βˆ’ actual GNP gap = zero; prices rise.
  • 2. Peak β€” upper turning point. Monetarists: contraction of bank credit. Keynes: collapse of marginal efficiency of capital.
  • 3. Contraction / Depression β€” GNP & employment fall, involuntary unemployment, prices fall, rate of interest falls, large excess capacity. Capital & durable goods industries hit hardest.
  • 4. Trough & Revival β€” lowest activity; capital depreciates without replacement; new technology + credit expansion trigger revival. Recovery = turning point from depression into expansion.
Causes of fluctuations
  • Keynes: volatile private investment via marginal efficiency of capital.
  • Multiplier Γ— Accelerator interaction. Multiplier: Ξ”I β†’ magnified Ξ”Y. Accelerator: Ξ”Y β†’ induced Ξ”I.
  • Monetarists (Friedman): changes in money supply; the Great Depression was caused by tight money policy β€” a failure of government, not the market.
Exam keywords
four phasespeak & troughmarginal efficiency of capitalmultiplier-acceleratorcycles with trend

UNIT 03 β€” Fiscal & Monetary Policy

Goals of macro policy: (1) economic stability at high output & employment (2) price stability (3) economic growth.

Fiscal policy
  • Recession β†’ expansionary β†’ deficit budget (↑G and/or ↓T). Inflation β†’ contractionary β†’ surplus budget (↓G and/or ↑T).
  • ↑G works directly (incomes of suppliers/workers) and indirectly via the multiplier. Size of required increase depends on the GNP gap and the multiplier (which depends on MPC).
  • Automatic / built-in stabilisers (non-discretionary): progressive personal income taxes Β· corporate income taxes Β· transfer payments (unemployment compensation, welfare) Β· stable corporate dividend policy.
  • Limitation: automatic stabilisers reduced US income fluctuations by only about one-third β€” discretionary policy still needed.
  • Crowding out: deficit β†’ borrowing β†’ ↑ interest rate β†’ ↓ private investment β†’ smaller net effect.
Monetary policy
  • Expansionary (easy money) to cure recession: β‘  buy securities in open market β‘‘ lower bank rate β‘’ lower CRR (and SLR).
  • Tight money to control inflation: raise interest rate, reduce credit, raise CRR, sell government securities. Plus selective credit controls.
  • CRR = cash reserves with central bank. SLR = specified liquid assets (e.g. govt securities).
  • Keynes' scepticism: in depression money demand is highly interest-elastic (liquidity trap) and investment demand is not much interest-elastic β†’ monetary policy weak, so he favoured fiscal policy.
  • Monetarists: favour a constant, stable growth rate of money supply over discretionary action.
Exam keywords
discretionary vs automaticbuilt-in stabiliserscrowding outopen market operationsCRR / SLRliquidity trap