Jean's Study Palace — EE212 Macroeconomics

Study Hub · Rebuilt for teaching

Principles of Macroeconomics — your complete study companion

This hub rebuilds the EE212 lecture slides into a teaching format: every key idea is explained in plain language (often beyond the slide), every important formula is boxed, the blanks your professor left are filled in and marked with a green tag, and the hard ideas come with clean graphs. Four units, then fully-worked assignments.

How to use this Read a unit top-to-bottom. Watch for filled-in answers, blue Key boxes (must-know), red Careful boxes (common exam traps), and gold Exam boxes (likely to be tested). Use the search bar to jump to any term.

Introduction to Macroeconomics

What economics is · micro vs macro · goals & policies · types of variables · key indicators · schools of thought.

1.1 What economics is

Economics = the science of scarcity and choice

Economics studies how individuals and societies choose to use the scarce resources that nature and previous generations provided. Because resources are limited but wants are unlimited, choice is unavoidable.

Scarcity — we "cannot have it all", so we must decide what to have and what to forgo.

Trade-off — to get one thing you give up another.

Opportunity cost — the value of the next best alternative you gave up. This is the single most important idea in the whole course.

Intuition“There is no such thing as a free lunch.” Even a “free” hour of Netflix costs you the study (or sleep) you could have done instead — that forgone best option is its true cost.

The three basic questions every society answers

What to produce?
How to produce it?
For whom — who gets the goods and services?

Micro vs. Macro

Microeconomics zooms in — individual industries, firms and households (one market's price & quantity).

Macroeconomics zooms out — the whole nation's aggregates: total income, employment, output, the price level.

Positive vs. Normative

Positive = facts & cause-effect, no value judgment (“what is”). e.g. “A tax cut raised spending 2%.”

Normative = value judgments (“what should be”). e.g. “The government ought to cut taxes.” Policy debates are normative.

1.2 Objectives & policies

The four goals — and the two big policy levers

Economists judge outcomes against four criteria:

Efficiency (allocative) — produce what people want at the least possible cost.

Equity — fairness in how output is shared.

Growth — an increase in the economy's total output over time.

Stability — output grows steadily, with low inflation and full employment.

The two policies (memorise the split) Fiscal policy = the Government's taxing & spending (Chapter 4).
Monetary policy = the Central Bank's tools to control the quantity of money.

1.3 Types of variables

Stock vs. Flow, and Nominal vs. Real

Stock vs. Flow

Stock = measured at an instant (a photograph). Flow = measured over a period (a video).

Test yourself “FDI during 2016–2020” is a flow. “Total FDI held on 31 Dec 2020” is a stock. Wealth = stock; income & saving = flows.

Nominal vs. Real

Nominal = not adjusted for price changes. Real = adjusted for prices (divide out inflation).

Real income = YP · Real interest rate r = i − inflation

Why it mattersOnly real variables tell you about actual purchasing power. A 5% raise with 8% inflation makes you poorer in real terms.

1.4 Key indicators

The dashboard of the economy

Macro health is read from three groups of indicators:

Level & growth of output — GDP and its growth rate.
Internal stability — inflation, unemployment, interest rates, income distribution.
External stability — balance of payments, international reserves, external debt, exchange rate.

① Output & the business cycle

Aggregate output = total goods & services produced in a period. The business cycle is its short-run ups and downs around a rising long-run trend.

Definitions to nail Recession = output falls for two consecutive quarters. Depression = a prolonged, deep recession.

The cycle oscillates around a rising trend: peak → recession (down) → trough → recovery (up).

② Prices & inflation

Inflation — a rise in the overall price level. Deflation — a fall. Hyperinflation — very rapid inflation.

CPI (Consumer Price Index) & PPI (Producer Price Index) measure the price level.

Core inflation strips out volatile items (energy, fresh food) to reveal the underlying trend.

Inflation rate_{year t} = CPI_t − CPI_t−1CPI_t−1 × 100

③ Unemployment

Population = Labour force + Non-labour force
Labour-force participation rate = Labour forceWorking-age population × 100
Unemployment rate = UnemployedLabour force × 100 ← the blank: divide by the labour force, not population

Three types of unemployment Frictional — normal short-run job search / people between jobs (always exists).
Structural — skills/industries no longer match the economy (e.g. automation).
Cyclical — caused by recessions (demand falls).

Natural rate of unemployment = Frictional + Structural. It's the unemployment that remains even at "full employment" — cyclical unemployment is zero at the natural rate.

④ Interest rates

Real interest rate = Nominal interest rate − Inflation rate

Creditors (lenders/savers) want the real rate high; debtors (borrowers) want it low. Loan rate > deposit rate — the spread is the bank's margin.

⑤ Income distribution — Lorenz curve & Gini

The further the Lorenz curve bows away from the 45° line, the more unequal the distribution.

Gini coefficient = Area AArea A + Area B

Read the number Gini ranges 0 → 1. 0 = perfect equality (everyone the same), 1 = perfect inequality (one person has everything). Higher Gini = more unequal income distribution.

1.5 History of macroeconomic thought

From Classical to Keynesian — the big argument that runs through this course

Classical (Adam Smith, 1776) — the market's “invisible hand” coordinates self-interest into social good; division of labour raises output. Reaction against mercantilism.

Marx — focused on the unfair distribution of industrial gains; history as “class struggle” between owners of capital and labour.

Neo-classical (Marshall) — “father of modern economics”; markets are efficient & self-regulating; introduced homo economicus (rational self-interested agent).

Keynes (1936, Great Depression) — markets do not always self-correct; in slumps the government should boost aggregate demand (spend, cut interest rates, invest).

Monetarists (Friedman) — crises come from bad monetary policy; government should control the money supply and leave goods markets alone. Led to neo-liberalism (privatise, free trade).

The distinction you must remember all term Classical = the long run: prices & wages are flexible, economy sits at full employment.
Keynesian = the short run: prices & wages are sticky, economy can sit below full employment — so policy has room to work.
Keynes: “In the long run we are all dead.”

National Income & Product Accounts (GDP)

Circular flow · what GDP is · GDP vs GNP · the three ways to measure it · nominal vs real & the deflator · limitations.

2.1–2.2 The players & the circular flow

Five sectors, one loop of money

Macro tracks five groups: (1) Households + (2) Firms = the private sector, (3) Government, (4) Rest of the world, and (5) Financial institutions.

The circular flow shows income and payments moving between them. Two forces act on the loop:

Injections (money in) Investment I, Government spending G, Exports X.

Withdrawals / Leakages (money out) Saving S, Taxes T, Imports M.

Households supply factors & earn income; they spend it on firms' output. Injections add to the loop; leakages drain it.

2.3 What GDP is

Gross Domestic Product — read the definition word-by-word

GDP = total market value of all final goods & services produced within a period by factors of production located within a country.

Final goods = for final use. Intermediate goods = used up in producing something else — not counted directly (avoids double counting).

Value added = value of output leaving a stage − cost of inputs entering it. Summing value added = summing final value.

Located within the country — GDP is about where production happens, not who owns the factors.

What GDP excludes Used goods & pure paper transactions (a house built 3 years ago is not in this year's GDP). But the agent's commission on selling it is — that's a new service produced this year. Only new, current production counts.

2.4 GDP vs GNP

Where vs. Whose

GDP — output produced inside the country (any owner).

GNP — output produced by a country's citizens/factors (anywhere in the world).

GNP = GDP + income of Thai factors used abroad − income of foreign factors used in Thailand
The correction term is called Net Factor Income from Abroad (NFIEA).

ExampleProfit of a Thai-owned factory in Laos → adds to Thai GNP (not Thai GDP). A Japanese-owned factory in Bangkok → adds to Thai GDP (not Thai GNP).

2.5 Three ways to measure GDP

Same number, three doors — they must all agree

(a) Production (value-added) approach

Sum the value added at every stage. Worked from the slide (orange-juice example):

Stage	Sales value	Value added
Oranges (farm)	500	500
Orange juice	650	150
Juice bottled (factory)	900	250
Retail sale (supermarket)	1,200	300
Total value added	—	1,200

The pointTotal value added (1,200) = the final retail value (1,200). That's why we don't add up all the sales (500+650+900+1200) — that would double-count the oranges four times.

(b) Expenditure approach — the one you'll use most

GDP = C + I + G + (X − M)

C — Consumption: household spending. Durable goods, non-durables, and services.

I — Gross private investment: new capital by firms/households = non-residential (machines/plant) + residential (new housing) + change in inventories.

G — Government consumption & investment (excludes transfer payments like welfare — no new output).

X − M — Net exports: exports minus imports (can be negative).

Inventories — filled-in example Begin: 2 units. Produce: 7. Sell: 6. End: 3 units (×10฿).
Change in inventories = end − beginning = 3 − 2 = 1 unit = 10 ฿. This counts as investment even though it wasn't sold — it was produced this year.
GDP = final sales + change in inventories + other components.

Gross vs Net Net investment = Gross investment − Depreciation.
NDP = GDP − Depreciation. So NDP = C + (I − Depreciation) + G + (X − M).

(c) Income approach

National income = Factor incomes + (indirect taxes − subsidies) + net business transfers + surplus of gov. enterprises
Factor incomes = compensation of employees + proprietors' income + corporate profits + net interest + rental income.

The full ladder (very exam-friendly) GDP → + NFIEA → GNP → − Depreciation → NNP → − Statistical discrepancy → NI → − (retained earnings + other non-household parts) → PI → − personal income tax → DI.
And disposable income splits: DI = C + S (if no personal interest/transfer payments).

2.6 Nominal vs Real GDP & the deflator

Separating "more stuff" from "higher prices"

Nominal GDP = Σ (P_current × Q_current) — uses this year's prices
Real GDP = Σ (P_{base year} × Q_current) — holds prices fixed at the base year

GDP deflator = Nominal GDPReal GDP × 100

Why we bother Nominal GDP can rise just because prices rose. Real GDP strips prices out, so it measures genuine growth in output. The deflator is the economy-wide price level implied by that comparison. In the base year, Real = Nominal, so the deflator = 100.

→ Full numeric solution (base year = Year 3) is in Worked Example A2.

2.7 Limitations of GDP

GDP is not the same as well-being

GDP & welfareIgnores crime, leisure, pollution and how income is distributed (use GDP per capita + Gini for that).

GDP & measurementMisses the underground economy and non-market work (housework, volunteering) — real production that never shows up.

National Income & Equilibrium Determination

The Keynesian core: consumption & saving · investment · the DAE line · equilibrium (two methods) · the multiplier · paradox of thrift · GDP gaps.

3.1 The key idea

Desired vs. Actual — the engine of Keynesian economics

Keynes built the model on desired (planned) spending, not actual spending. The gap between them is unplanned inventory, and it's what pushes the economy toward equilibrium.

Actual Aggregate Expenditure = Actual C + Actual I (always = output, by accounting)
DAE (Desired Aggregate Expenditure) = Desired C + Desired I + G + (X − M)

The crucial split — investment Actual I = Planned I + Unplanned inventory investment. When firms can't sell what they made, goods pile up as unplanned inventory (actual > planned). When they sell more than expected, inventories fall below plan (actual < planned). This mismatch is the signal to change production.

3.2.1 Consumption & saving

The consumption function C = C_a + bY_d

Keynes: the main driver of consumption is disposable income Y_d = Y − T. Using the slide's numbers, C = 100 + 0.6Y_d.

C_a = autonomous consumption (spending even at zero income = 100)
b = MPC = ΔCΔY_d = slope = 0.6 → of each extra ฿, 60 satang is spent
APC = CY_d (average) MPC = marginal (the slope)

Golden rule MPC + MPS = 1. Every extra baht is either spent or saved. Here MPC = 0.6, so MPS = 0.4.

Saving is just the mirror image

S = Y_d − C = Y_d − (C_a + bY_d) = −C_a + (1 − b)Y_d
S = −100 + 0.4Y_d → intercept −C_a, slope = MPS = 0.4

Break-even income (where C = Y_d, S = 0) 100 + 0.6Y_d = Y_d → 0.4Y_d = 100 → Y_d* = 250. Below it households dissave (borrow / sell assets); above it they save.

Where the C-line meets the 45° line, C = Y_d and saving = 0. Left of it C > Y_d (dissaving); right of it households save.

Move ALONG vs. SHIFT (classic exam question) A change in Y_d → move along the C (or S) curve. A change in any other factor (interest rate, expectations, wealth, population) → the whole curve shifts.

Two rival theories (know the one-liners) Permanent Income (Friedman): consumption depends on permanent (expected long-run) income, not this year's. A one-off bonus is mostly saved.
Life-Cycle (Ando & Modigliani): people smooth consumption over a lifetime — borrow when young, save in middle age, dissave in retirement.

3.2.2–3.2.4 The other components

Investment, Government & Net exports

Investment I

Driven by the real interest rate (↑r → ↓I) and income (↑Y → ↑I), plus technology, existing capital, taxes, expectations.

Autonomous: I = I_a
Induced: I = I_a + dY

Invest when… NPV > 0, or equivalently MEC (IRR) > i — the project's return beats the market interest rate.

Accelerator principle: investment demand is derived from the change in output — a rising ΔY accelerates net investment.

Government G & Net exports (X−M)

G is set by policy, planned in advance → treated as autonomous (G = G_a, flat line vs. Y). Expansionary policy shifts it up; contractionary shifts it down.

Exports X depend on foreign demand → autonomous (X = X_a).

Imports rise with income: M = M_a + mY
m = MPM = ΔMΔY

3.2 The DAE line

Add it all up

DAE = C + I + G + (X − M)
= (C_a − bT_a + I_a + G_a + X_a − M_a) + (b + d − m)Y
↑ autonomous part (the intercept) ↑ slope of the DAE line

Slope of DAE = MPC + MPI − MPM = (b + d − m). Every extra ฿ of income induces this much extra spending. It's always < 1, which is what makes equilibrium stable and the multiplier finite.

3.3 Equilibrium — Method 1

Y = DAE (the "Keynesian cross")

Equilibrium = no tendency to change. In the goods market that means output equals desired spending:

Y = DAE

Left of Y_E, desired spending exceeds output → inventories fall unexpectedly → firms raise output. Right of it, the reverse. Only at Y_E is there no pressure.

Equilibrium formulas (memorise the pattern) Closed, no gov: Y_E = 11 − b(C_a + I_a)
Closed, with gov: Y_E = 11 − b(C_a − bT_a + I_a + G_a)
Open, with gov: Y_E = 11 − b + m(C_a − bT_a + I_a + G_a + X_a − M_a)

Worked (closed, with gov) C=100+0.6Y_d, I=40, T=10, G=60 → Y_E = 2.5 [100 − 0.6(10) + 40 + 60] = 2.5(194) = 485.

3.3 Equilibrium — Method 2

Injection = Leakage (must give the same Y_E)

At equilibrium the money added to the loop equals the money drained from it:

Closed, no gov: I = S
Closed, with gov: I + G = S + T
Open, with gov: I + G + X = S + T + M

When injection > leakage the economy expands; when leakage > injection it contracts. Equal at Y_E.

→ Both methods solved on the same numbers in A3 & A4 — and they agree (Y_E = 880).

3.3 The multiplier

Why a small push moves income a lot

Spend 1,000฿ building a factory. The builders earn 1,000฿; they spend MPC of it (600฿); those receivers spend 600×0.6 = 360฿; and so on — an infinite but shrinking chain:

ΔY = 1000(1 + 0.6 + 0.6² + …) = 1000 × 11 − 0.6 = 1000 × 2.5 = 2,500

Multiplier formulas Simple spending multiplier k = 11 − MPC = 1MPS.
More leakages → smaller multiplier. Adding an income tax and imports changes the denominator to (1 − slope of DAE). Higher MPC (or lower MPS) → bigger multiplier.

Tax & balanced-budget multipliers (closed economy) Government-spending multiplier = 11−b. Tax multiplier = −b1−b (smaller & negative — a tax cut is weaker than equal spending, because part is saved).
Balanced-budget multiplier = 1: raise G and T by the same amount and Y rises by exactly that amount.

3.4 Paradox of thrift

If everyone saves more, everyone earns less

An individual saving more is prudent. But if everyone tries to save more at once, aggregate demand falls → firms cut output → income falls → and society may end up saving the same (or less). This is a fallacy of composition: what's true for one isn't true for all.

The S curve shifts up (more thrift). With I fixed, the new intersection sits at a lower Y — and saving is unchanged. If investment is induced (I=I_a+dY), income falls even further.

Policy takeawayShort run (fight a slump): encourage spending (↓S, ↑C). Long run (fund growth): encourage saving (↑S) so there are funds for investment.

3.5 GDP gaps

Inflationary vs. Deflationary gap

Compare equilibrium output Y_E with full-employment (potential) output Y_F.

DAE > output at Y_F: too much demand → inflation. Fix: reduce DAE (↑T or ↓G).

DAE < output at Y_F: too little demand → unemployment. Fix: raise DAE (↓T or ↑G).

3.6 Keynes vs Classical vs in-between (the multiplier's size depends on prices) Keynesian: below full employment, prices sticky → when DAE rises, only Y rises → biggest multiplier.
Classical: at full employment, prices flexible → DAE↑ mostly raises P, not Y → smallest multiplier.
Non-Keynes non-classic: below full employment but prices do move → in between.
So ΔY: Keynes > in-between > Classical.

Fiscal Policy

Government spending & taxing · tools · tax structures · public debt · budget types · automatic vs discretionary · policy problems.

4.1–4.3 Meaning & tools

Fiscal policy = the government's spending & taxing choices

Its objectives mirror the four macro goals: efficient allocation, fair distribution, growth, and stability. Four tools:

Government expenditure (G) — consumption, investment, and loan/interest payments.

Transfer payments (R) — welfare, unemployment benefits, pensions, veterans' benefits. Not counted in G/GDP — no new output, just redistribution.

Revenue (T) — mostly taxes (below), plus non-tax revenue (state enterprises, fees, fines).

Public debt — borrowing to finance a deficit.

Direct vs Indirect tax Direct — the payer cannot shift the burden (personal & corporate income tax, inheritance, property tax).
Indirect — the payer can shift it onto others (VAT/sales tax, excise, customs duties).

4.3.3 Tax structures — with the blanks filled & checked

Progressive · Proportional · Regressive

Compare the average tax rate (T/Y) and marginal tax rate (ΔT/ΔY) as income rises. Same three income bands (each 1,000 wide) in every table.

① Progressive — rate rises with income

Income band	Rate	Cumulative Y	Tax paid T	Avg rate T/Y	Marginal ΔT/ΔY
0–1,000	10%	1,000	100	0.100	0.10
1,001–2,000	12%	2,000	220	0.110	0.12
2,001–3,000	15%	3,000	370	0.123	0.15

T at 2,000 = 100 + (1,000×0.12) = 220; T at 3,000 = 220 + (1,000×0.15) = 370.

SummaryIncome ↑ → tax rate rises. And marginal > average at every step. This is Thailand's personal-income-tax design.

② Proportional (constant)

Y	T (10%)	T/Y	ΔT/ΔY
1,000	100	0.10	0.10
2,000	200	0.10	0.10
3,000	300	0.10	0.10

SummaryRate is constant; marginal = average.

③ Regressive — rate falls with income

Y	T	T/Y	ΔT/ΔY
1,000	150 (15%)	0.150	0.15
2,000	270 (12%)	0.135	0.12
3,000	370 (10%)	0.123	0.10

SummaryRate falls; marginal < average.

Exam shortcutCompare marginal vs average: MTR > ATR → progressive · MTR = ATR → proportional · MTR < ATR → regressive.

4.3.4 Public debt & budgets

Borrowing and the budget balance

Public debt is classified by term (short < 1 yr, long > 5 yr) and source (domestic vs. international). It affects price stability, resource allocation, income distribution, and the state's ability to run projects.

Three budget types (G + R vs T) Deficit: G + R > T (spend more than you take) · Surplus: G + R < T · Balanced: G + R = T.
In accounting terms total spending is financed by revenue + public debt + treasury reserves.

4.4 Types of fiscal policy

Automatic vs. discretionary — and expansion vs. contraction

Non-discretionary = Automatic stabilisers Work by themselves, no new law needed. Boom → tax take rises & welfare falls automatically → cools the economy. Slump → taxes fall & welfare rises automatically → cushions the fall.
Tools: income tax (T = T_a + tY) and transfer payments (R = R_a − gY).

Discretionary Deliberate changes to tax types, tax rates, or G when automatic stabilisers aren't enough. Slump → ↑G / ↓T (expansionary). Overheating → ↓G / ↑T (contractionary).

Match the disease to the cure Recession / deflationary gap → Expansionary: ↑G, ↓T → DAE↑ → Y↑.
Inflation / inflationary gap → Contractionary: ↓G, ↑T → DAE↓ → Y↓.

4.4 Why fiscal policy is hard

Six real-world problems

Lags — recognition → decision → execution → response. By the time it acts, the problem may have changed.
Irreversibility — programmes are hard to switch off once the crisis passes.
Expectations — if people think a stimulus is temporary, they don't change behaviour.
Political goals can conflict with economic stability (spending before elections).
Extra saving — an expansion fails to stimulate if households just save the extra income (paradox of thrift again).
Crowding-out — government borrowing pushes up interest rates and displaces private investment.

Thailand's Sustainable Fiscal Framework (targets) Public debt / GDP < 60% ✓ · Debt / budget < 15% ✓ · Balanced budget ✗ (government chose to stimulate) · Investment share of spending > 25% ✗.

★

Worked Examples (Assignments, fully solved)

Every step shown, so you can reproduce these under exam conditions. Numbers taken from your assignment sheets.

Assignment 2 · GDP calculation

Nominal & Real GDP, deflator, inflation — base year = Year 3

Three goods: Books (B), Rulers (R), Erasers (E).

Year	P_B	Q_B	P_R	Q_R	P_E	Q_E
1	100	80	20	300	5	250
2	120	60	30	250	6	150
3 (base)	130	90	35	400	7	450

Nominal GDP = Σ (current P × current Q)

Year 1 = 100·80 + 20·300 + 5·250 = 8,000 + 6,000 + 1,250 = 15,250
Year 2 = 120·60 + 30·250 + 6·150 = 7,200 + 7,500 + 900 = 15,600
Year 3 = 130·90 + 35·400 + 7·450 = 11,700 + 14,000 + 3,150 = 28,850

Real GDP = Σ (Year-3 P × current Q) — prices fixed at 130 / 35 / 7

Year 1 = 130·80 + 35·300 + 7·250 = 10,400 + 10,500 + 1,750 = 22,650
Year 2 = 130·60 + 35·250 + 7·150 = 7,800 + 8,750 + 1,050 = 17,600
Year 3 = 130·90 + 35·400 + 7·450 = 28,850 (= nominal, because Year 3 is the base year ✓)

GDP deflator = (Nominal ÷ Real) × 100

Year 1 = 15,250 / 22,650 × 100 = 67.33
Year 2 = 15,600 / 17,600 × 100 = 88.64
Year 3 = 28,850 / 28,850 × 100 = 100.00

Growth rates

Nominal growth Y2 = (15,600−15,250)/15,250 = +2.30%
Nominal growth Y3 = (28,850−15,600)/15,600 = +84.94%
Real growth Y2 = (17,600−22,650)/22,650 = −22.30%
Real growth Y3 = (28,850−17,600)/17,600 = +63.92%

Inflation (from the deflator)

Year 2 = (88.64−67.33)/67.33 = +31.65%
Year 3 = (100−88.64)/88.64 = +12.82%

Read the storyIn Year 2, nominal GDP barely moved (+2.3%) but real GDP fell sharply (−22.3%) — output actually shrank; prices masked it. That's exactly why we compute real GDP.

Assignment 3 · Equilibrium (Y = DAE)

Open economy with government — every step

Given: C = 80 + 0.4Y_d, I = 50 + 0.6Y, G = 30, T = 10 + 0.1Y, X = 40, M = 20 + 0.16Y, with Y_d = Y − T.

Step 1 — substitute to get C in terms of Y

Y_d = Y − T = Y − (10 + 0.1Y) = −10 + 0.9Y
C = 80 + 0.4(−10 + 0.9Y) = 80 − 4 + 0.36Y = 76 + 0.36Y

Step 2 — build DAE

DAE = C + I + G + X − M
= (76 + 0.36Y) + (50 + 0.6Y) + 30 + 40 − (20 + 0.16Y)
= (76+50+30+40−20) + (0.36+0.6−0.16)Y = 176 + 0.80Y

Step 3 — set Y = DAE (Question 1)

Y = 176 + 0.8Y → 0.2Y = 176 → Y_E = 880

Question 3 — multipliers (the important, subtle part)

The DAE slope is k = b(1−t) + d − m = 0.4(0.9) + 0.6 − 0.16 = 0.80, so the common multiplier is:

11 − k = 11 − 0.8 = 5

Autonomous variable	Multiplier (∂Y/∂·)
C_a, I_a, G_a, X_a (spending)	+5
M_a (imports — a leakage)	−5
T_a (autonomous tax) = −b/(1−k)	−0.4/0.2 = −2

Meaning: +1 unit of autonomous G raises equilibrium income by 5 units; +1 unit of autonomous tax lowers it by 2 units.

Careful — a genuine inconsistency in the lecture slides Some slides compute these multipliers with the shortcut 1/(1−b+m) = 1/0.76 ≈ 1.32. That shortcut is only valid when investment and taxes are purely autonomous. Here investment has an induced part (+0.6Y) and tax is induced (+0.1Y), which is exactly why Y_E came out as 880 (using slope 0.8). To stay consistent with that same Y_E, the correct multiplier is 1/(1−0.8) = 5, and the tax multiplier is −2. Use the reduced-form (slope) method and you can't go wrong.

Question 4 — ΔG_a = +4 and ΔT_a = +20

ΔY = (G-multiplier)ΔG_a + (T-multiplier)ΔT_a = (+5)(4) + (−2)(20) = 20 − 40 = −20
New Y_E = 880 − 20 = 860

Check by re-deriving: new G=34, T=30+0.1Y → C=68+0.36Y → DAE=172+0.8Y → Y_E=172/0.2=860 ✓

Question 5 — if current income is 700 (below Y_E)

At Y = 700, DAE = 176 + 0.8(700) = 736 > 700. Desired spending exceeds output → inventories fall unexpectedly → firms raise production → income rises. The process continues until Y = 880, the equilibrium.

Assignment 4 · Equilibrium (Injection = Leakage)

Same economy, second method — should give Y_E = 880 again

Step 1 — saving function

S = Y_d − C = Y_d − (80 + 0.4Y_d) = −80 + 0.6Y_d
with Y_d = −10 + 0.9Y → S = −80 + 0.6(−10 + 0.9Y) = −86 + 0.54Y

Step 2 — set Injection = Leakage (Question 1)

Injection: I + G + X = (50 + 0.6Y) + 30 + 40 = 120 + 0.6Y
Leakage: S + T + M = (−86 + 0.54Y) + (10 + 0.1Y) + (20 + 0.16Y) = −56 + 0.8Y
120 + 0.6Y = −56 + 0.8Y → 176 = 0.2Y → Y_E = 880 ✓ (matches Method 1)

Question 4 — autonomous saving rises 7 units (Paradox of Thrift)

More autonomous saving = less autonomous consumption (C_a effectively ↓7). Saving is a leakage, so with multiplier 5:

ΔY = −5 × 7 = −35 → New Y_E = 880 − 35 = 845

LessonTrying to save more made national income fall — the paradox of thrift in one calculation.

Question 5 — if current income is 950 (above Y_E)

At Y = 950, leakage (−56 + 0.8·950 = 704) > injection (120 + 0.6·950 = 690). Output exceeds desired spending → goods pile up as unplanned inventory → firms cut production → income falls until Y = 880.

Formula Cheat-Sheet

One-page revision

National accounts

GDP = C + I + G + (X − M)
Deflator = (Nominal ÷ Real) × 100
GNP = GDP + NFIEA
NNP = GNP − Depreciation
DI = C + S

Consumption & saving

C = C_a + bY_d ; S = −C_a + (1−b)Y_d
MPC + MPS = 1
Break-even: C = Y_d (S = 0)

Equilibrium (open, with gov)

Y_E = C_a − bT_a + I_a + G_a + X_a − M_a1 − b + m
or solve Y = DAE directly (safest)

Multipliers

Spending k = 11 − slope of DAE = 1MPS (simplest case)
Tax = −b1 − b ; Balanced-budget = 1

Rates

Real r = i − inflation
Unemployment = (Unemployed ÷ Labour force) × 100
Gini = A ÷ (A + B)

Exam survival kit ① Always write Y_d = Y − T first. ② Collect the autonomous intercept and the Y-slope separately. ③ Solve Y = DAE. ④ Multiplier = 1/(1 − slope). ⑤ Sign-check: spending & exports +, imports & taxes −. ⑥ Below Y_E → produce more; above Y_E → produce less.

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Principles of Macroeconomics — your complete study companion

Introduction to Macroeconomics

Economics = the science of scarcity and choice

The three basic questions every society answers

Micro vs. Macro

Positive vs. Normative

The four goals — and the two big policy levers

Stock vs. Flow, and Nominal vs. Real

Stock vs. Flow

Nominal vs. Real

The dashboard of the economy

① Output & the business cycle

② Prices & inflation

③ Unemployment

④ Interest rates

⑤ Income distribution — Lorenz curve & Gini

From Classical to Keynesian — the big argument that runs through this course

National Income & Product Accounts (GDP)

Five sectors, one loop of money

Gross Domestic Product — read the definition word-by-word

Where vs. Whose

Same number, three doors — they must all agree

(a) Production (value-added) approach

(b) Expenditure approach — the one you'll use most

(c) Income approach

Separating "more stuff" from "higher prices"

GDP is not the same as well-being

National Income & Equilibrium Determination

Desired vs. Actual — the engine of Keynesian economics

The consumption function C = Ca + bYd

Saving is just the mirror image

Investment, Government & Net exports

Investment I

Government G & Net exports (X−M)

Add it all up

Y = DAE (the "Keynesian cross")

Injection = Leakage (must give the same YE)

Why a small push moves income a lot

If everyone saves more, everyone earns less

Inflationary vs. Deflationary gap

Fiscal Policy

Fiscal policy = the government's spending & taxing choices

Progressive · Proportional · Regressive

① Progressive — rate rises with income

② Proportional (constant)

③ Regressive — rate falls with income

Borrowing and the budget balance

Automatic vs. discretionary — and expansion vs. contraction

Six real-world problems

Worked Examples (Assignments, fully solved)

Nominal & Real GDP, deflator, inflation — base year = Year 3

Nominal GDP = Σ (current P × current Q)

Real GDP = Σ (Year-3 P × current Q) — prices fixed at 130 / 35 / 7

GDP deflator = (Nominal ÷ Real) × 100

Growth rates

Inflation (from the deflator)

Open economy with government — every step

Step 1 — substitute to get C in terms of Y

Step 2 — build DAE

Step 3 — set Y = DAE (Question 1)

Question 3 — multipliers (the important, subtle part)

Question 4 — ΔGa = +4 and ΔTa = +20

Question 5 — if current income is 700 (below YE)

Same economy, second method — should give YE = 880 again

Step 1 — saving function

Step 2 — set Injection = Leakage (Question 1)

Question 4 — autonomous saving rises 7 units (Paradox of Thrift)

Question 5 — if current income is 950 (above YE)

Formula Cheat-Sheet

National accounts

Consumption & saving

Equilibrium (open, with gov)

Multipliers

Rates

The consumption function C = C_a + bY_d

Injection = Leakage (must give the same Y_E)

Question 4 — ΔG_a = +4 and ΔT_a = +20

Question 5 — if current income is 700 (below Y_E)

Same economy, second method — should give Y_E = 880 again

Question 5 — if current income is 950 (above Y_E)