ECO 102: Introduction to Macroeconomics Study Guide (South African Institutions)

ECO 102: Introduction to Macroeconomics is the foundational module that builds your ability to analyze the economy “as a whole.” In this course, you learn how economists measure output, inflation, employment, interest rates, and government policy—and how these variables interact through models such as the classical model, Keynesian cross, and the AD-AS framework. This study guide is designed to help you succeed in assessments by combining conceptual clarity with exam-style reasoning, South African policy context, and worked examples you can adapt to typical test questions.

1) Macroeconomic Thinking, Core Variables, and the Measurement of Economic Performance

Macroeconomics studies relationships among aggregates—GDP, inflation, unemployment, economic growth, government spending, taxation, money supply, and net exports. Your goal in ECO 102 is not to memorize definitions only, but to interpret graphs, explain mechanisms, and apply models to real scenarios.

1.1 What “Macroeconomics” Actually Means in Exam Terms

A common exam trap is treating macroeconomics as “a list of facts.” Instead, exam questions reward the ability to answer in the form:

1. Identify the macro variable(s) (e.g., inflation, unemployment, GDP growth).
2. Explain how the variable is measured (e.g., CPI for inflation).
3. Model the mechanism (e.g., AD shifts due to government spending; AS changes due to input costs).
4. Predict the direction of change and graph movement (e.g., price level up; real GDP down).
5. Evaluate policy trade-offs (e.g., inflation vs growth; unemployment vs inflation).

In South Africa, these ideas appear often because the economy faces persistent themes: unemployment, electricity and logistics constraints, exchange rate fluctuations, and the interaction between global commodity prices and domestic inflation.

1.2 GDP: The Backbone of Macroeconomic Measurement

Expenditure approach (most common in beginner macro exams)

[
\text{GDP} = C + I + G + (X – M)
]
Where:

• C = household consumption
• I = investment (capital formation)
• G = government spending
• X − M = net exports (exports minus imports)

Exam-style explanation: If households become pessimistic and reduce spending, C falls, shifting AD left. That reduces real GDP and usually employment. If imports also fall because domestic prices are high, X − M may increase, partly offsetting the AD decline.

Income approach (optional for intro courses)

GDP can also be measured as the sum of incomes: wages, rents, profit, interest—minus any statistical discrepancies. Most ECO 102 syllabi emphasize expenditure and real/nominal GDP.

Nominal vs Real GDP (a must-have distinction)

• Nominal GDP measures production using current prices.
• Real GDP adjusts for inflation (uses base-year prices).

To convert nominal to real, economists use a GDP deflator (or CPI depending on context). In exams, you often don’t calculate the full deflator, but you must interpret the difference: nominal can rise because prices rise even if real output does not.

1.3 Measuring Inflation: CPI, Inflation Rates, and Real Purchasing Power

Inflation in many intro macro courses is measured using the Consumer Price Index (CPI).

Inflation rate formula

[
\text{Inflation rate} = \frac{\text{CPI}{t} – \text{CPI}{t-1}}{\text{CPI}_{t-1}} \times 100%
]

Why it matters: Inflation affects:

• Real wages (if wages don’t rise with prices)
• Real interest rates
• Household purchasing power
• Cost of living and social welfare

Real vs nominal interest rates

A frequent macro exam question uses the Fisher effect approximation:
[
i \approx r + \pi
]
Where:

• ( i ) = nominal interest rate
• ( r ) = real interest rate
• ( \pi ) = inflation

Example (conceptual, exam-ready):
If inflation is 6% and nominal interest is 10%, then real interest is roughly 4%. Higher inflation erodes real returns unless nominal rates adjust.

1.4 Unemployment: Types, Measurement, and Why the “Rate” is Not the Whole Story

The unemployment rate is typically defined as:
[
\text{Unemployment rate}=\frac{\text{Unemployed}}{\text{Labour force}} \times 100%
]

But intro macro questions often ask you to think beyond the headline number by distinguishing:

• Frictional unemployment: people between jobs; temporary matching problem.
• Structural unemployment: mismatch of skills/industries.
• Cyclical unemployment: unemployment rising when output is below potential.

South African relevance: Even if GDP rises, structural unemployment may persist if skills don’t match labour demand. That’s why policy debates emphasize education, training, labour market reforms, and sector development alongside macro stabilization.

1.5 Economic Growth and the Production Possibility of a Nation

Growth is the sustained increase in real output over time. In typical ECO 102 narratives, growth is linked to:

• Capital accumulation (I)
• Labour force growth
• Technological progress
• Productivity (output per worker)

Exam link to policy: If government underinvests in infrastructure (transport, energy reliability), productivity growth can slow, limiting long-run GDP growth.

1.6 The Business Cycle: Expansion, Recession, and Stabilization

Macroeconomists examine how GDP, employment, and inflation fluctuate around trend.

• Expansion: output rises, unemployment tends to fall.
• Peak: economy at or near maximum output.
• Recession/Contraction: output falls; unemployment rises.
• Trough: lowest point before recovery.

Key exam move: When asked, “What happens to unemployment in a recession?” your answer should be mechanism-based: lower output reduces demand for labour, so unemployment rises.

2) The Classical View, Keynesian View, and the AD–AS Framework: From Theory to Graphs

This section builds the core models you’ll likely be tested on in ECO 102: the classical model (flexible prices, market-clearing), Keynesian ideas (aggregate demand drives short-run outcomes), and the AD–AS framework (integrating both).

2.1 Aggregate Demand (AD): What It Is and What Shifts It

Aggregate Demand (AD) is the total spending on domestic output at different price levels. In simple terms, AD depends on:

• C (consumption)
• I (investment)
• G (government spending)
• NX (net exports)

In the AD–AS graph:

• The price level is on the vertical axis.
• Real GDP/output is on the horizontal axis.
• AD slopes downward (as the price level rises, real money balances fall, real interest can rise, and spending declines—one classic mechanism).

Main AD shifters

1. Fiscal policy: changes in G and/or taxes.
   • Higher government spending → AD increases (shifts right).
   • Higher taxes → AD decreases (shifts left).
2. Monetary policy: changes in money supply, affecting interest rates and spending.
3. Wealth effects: changes in asset values influence consumption.
4. Exchange rate: depreciation can raise net exports, increasing AD.
5. Global income and demand: affecting exports.

Graph question approach: Always specify direction (“AD shifts right”) and consequences (“real GDP increases; price level rises in short run”).

2.2 Aggregate Supply (AS): Short Run vs Long Run

In intro macro, AS is often split into:

• Short-run aggregate supply (SRAS): positively sloped.
• Long-run aggregate supply (LRAS): vertical at potential output (often described as output determined by factor supplies and technology).

Why is SRAS upward sloping?

Because input prices (wages, raw materials) may be sticky in the short run, firms adjust production when prices for their output change.

Key AS shifters

• Input price changes: oil prices, electricity costs, imported intermediate inputs.
• Productivity changes: improvements reduce unit costs.
• Wage adjustments and labour market conditions.
• Supply shocks: droughts, energy outages, logistics disruptions.

South Africa exam relevance: Electricity supply constraints and imported fuel/inputs can act as negative supply shocks, shifting SRAS left and pushing prices up while output falls—classic stagflation-like dynamics.

2.3 The Keynesian Cross: How AD Determines Output in the Short Run

The Keynesian cross model shows how equilibrium output occurs where planned spending equals actual output.

Core idea

Planned expenditure:
[
AE = C + I + G
]
In many intro versions, consumption depends on income:
[
C = a + bY
]
Where:

• (a) = autonomous consumption (consumption when income is zero)
• (b) = marginal propensity to consume (MPC), between 0 and 1
• (Y) = real income/output

Equilibrium occurs when:
[
Y = AE
]

Multiplier intuition

If autonomous spending increases (say government spending increases), output increases by more than the spending change because induced consumption rises.

The simple Keynesian multiplier in one-sector model:
[
\text{Multiplier} = \frac{1}{1-b}
]
Larger MPC (higher (b)) means stronger multiplier: households spend a larger share of any extra income.

Exam question style: “Government increases spending by R200 million. MPC = 0.8. What is the predicted change in equilibrium output?”
Multiplier = 1/(1-0.8)=5 → output increases by R1 000 million.

(Note: ECO 102 exams may ask you to compute the multiplier from given MPC values.)

2.4 Classical Model: Prices and Wages Flexible; Markets Clear

In the classical framework (simplified for intro courses), economies are self-correcting:

• Wages and prices adjust so that labour and goods markets clear.
• Output tends to move toward potential output in the long run.

Key implications for policy (classical)

• Monetary policy mainly affects nominal variables in the long run.
• Fiscal policy changes in the short run may “crowd out” investment because interest rates rise to restore equilibrium.

In a typical exam, classical theory is used to contrast with Keynesian short-run rigidity.

2.5 AD–AS: Integrating Short-Run and Long-Run Outcomes

Now combine AD and AS:

• Short run equilibrium occurs at intersection of AD and SRAS.
• Long run equilibrium occurs where AD intersects LRAS (vertical line at potential output).

Two common scenarios

Scenario A: Demand shock (AD shifts)

• AD shifts right → short-run output rises above potential (Y > Y*), unemployment tends to fall.
• Price level rises.
• Over time, wage and price adjustments shift SRAS left, bringing output back to potential.

Scenario B: Supply shock (SRAS shifts)

• SRAS shifts left → output falls below potential.
• Price level rises.

This is the core mechanism behind stagflation-like patterns: higher unemployment and higher inflation simultaneously (at least in the short run).

2.6 Worked Graph Logic: How to Answer AD–AS Questions Under Exam Pressure

When asked to analyze a macro event, structure your answer:

1. Identify the shock: demand or supply?
2. State the shift: AD right/left; SRAS right/left; LRAS fixed.
3. State new equilibrium direction:
   • Output: increases/decreases relative to original.
   • Price level: increases/decreases relative to original.
4. State the dynamic adjustment:
   • If short-run equilibrium differs from potential, explain how SRAS eventually moves.
5. Link to policy implications: what should be done, and what trade-offs arise?

Example response template (no memorization needed, just logic):
“An increase in oil prices raises firms’ costs, shifting SRAS left. The short-run equilibrium moves to a higher price level and lower real GDP. As wages and input prices adjust, output returns toward potential, but inflation remains higher.”

3) Money, Banking, Interest Rates, and Fiscal/Monetary Policy in the South African Context

ECO 102 typically tests how interest rates and aggregate demand interact, as well as what monetary and fiscal policies are intended to achieve. This section connects core theory to contexts you are likely to see in South African-focused learning environments: central banking objectives, inflation targeting, and the role of government spending.

3.1 Money and the Role of Financial Markets

Functions of money

Money acts as:

• Medium of exchange
• Unit of account
• Store of value

In modern macro, money helps determine liquidity and interest rates, influencing spending.

Demand for money (simple intro model)

In many intro courses, money demand increases when:

• income rises (people need more transactions money)
• interest rates fall (opportunity cost decreases)

Money supply may be influenced by the central bank.

3.2 Banking System: Deposits, Loans, and the Money Creation Process

While ECO 102 may not go deep into micro banking, understanding basic money creation helps interpret policy transmission.

• When a bank makes a loan, it often creates a corresponding deposit in the borrower’s account.
• Loans can increase money supply depending on how much banks lend and how many reserves are required.

3.3 Interest Rates: The Transmission Mechanism to AD

Interest rates are central because they influence:

• Investment (I): higher rates reduce borrowing; lower rates encourage capital spending.
• Consumption (C): through credit costs (mortgages, consumer loans).
• Exchange rate expectations: higher relative interest rates can attract capital inflows, potentially strengthening currency (affecting net exports).

Policy transmission chain (common exam phrasing):
Monetary policy → interest rates → investment/consumption → AD → output and inflation.

3.4 Fiscal Policy: Government Spending, Taxes, and Crowding Out

Fiscal policy involves:

• G: government purchases
• T: taxes

Multiplier effect for spending changes

An increase in government spending can raise equilibrium output through the multiplier mechanism.

Crowding out idea

If fiscal expansion raises interest rates, private investment may fall, reducing the multiplier’s effect.

Exam nuance: Whether crowding out happens depends on assumptions:

• In liquidity-trap or underutilized resource conditions, crowding out may be limited.
• In fully employed economies, monetary policy response or demand pressures can increase interest rates.

3.5 Monetary Policy: Inflation Targeting Logic and Short-Run vs Long-Run Effects

In South Africa, macro discussions often reference the central bank’s focus on inflation within an inflation-targeting framework (commonly described as maintaining price stability). Even if your course does not require exact target numbers, you should know the general reasoning:

• The central bank changes policy interest rates.
• That influences other market rates.
• That affects credit conditions, spending, and inflation.

Why does monetary policy work with lags?

Because:

• contracts (wages, pricing) are set in advance
• borrowing decisions take time
• spending decisions respond with delays

Exams often reward answers that mention lags and uncertainty.

3.6 Policy Trade-offs: Inflation vs Employment vs Growth

A frequent exam essay question asks: “Should policy prioritize inflation or growth/unemployment?” In macro models, the answer is rarely either/or.

Short-run trade-off

• Expansionary policy can increase output and reduce unemployment but may raise inflation.
• Contractionary policy can reduce inflation but increase unemployment.

Long-run considerations

In the long run, sustainable growth depends on:

• productive capacity
• productivity and investment
• institutional quality and supply conditions

If policy only targets demand while neglecting supply-side constraints (skills, infrastructure, energy reliability), long-run outcomes remain limited.

3.7 A South Africa-Aligned Scenario: Demand Expansion vs Supply Shock

Consider two events and analyze them using the AD–AS model:

Case 1: Government spending increases

• AD shifts right.
• Output rises in the short run.
• Price level rises too.
• In the long run, output returns to potential, but higher inflation may persist depending on adjustment dynamics.

Case 2: Energy supply shock raises costs

• SRAS shifts left.
• Output falls.
• Price level rises.
• Even if government stimulates demand, inflation may remain problematic because supply cannot meet increased demand efficiently.

Exam insight: Students who recognize whether the shock is demand- or supply-side tend to score higher because they propose more coherent policy logic.

3.8 Example Calculations You Might See in ECO 102

Multiplier practice

Suppose MPC = 0.75 (so (b=0.75)). Multiplier:
[
\frac{1}{1-0.75}=\frac{1}{0.25}=4
]
If (G) increases by R150 million:

• Output increases by (150 \times 4 =) R600 million.

Real vs nominal (conceptual + quick numeric)

If nominal interest is 12% and inflation is 8%, real is approximately 4%.
If inflation rises but nominal interest stays constant, real interest falls, potentially stimulating AD (unless higher inflation expectations change behaviour).

4) The Balance of Payments, Exchange Rates, and International Economic Links

Even in an intro module, students are usually tested on how openness affects macro outcomes. South Africa’s economy is particularly exposed to exchange rates, commodity prices, and external demand. This section covers how net exports link to exchange rates, and how global shocks propagate into domestic inflation and growth.

4.1 Net Exports and the External Sector

Net exports are:
[
NX = X – M
]
Exports and imports are influenced by:

• Real exchange rate (competitiveness)
• Foreign income (demand for exports)
• Domestic income (import demand)
• World prices of imports (fuel, intermediate goods)

Typical exam logic:

• Currency depreciation can make exports cheaper and imports more expensive.
• That tends to increase net exports (at least in the short run, though contracts and adjustment costs may create delays).

4.2 Exchange Rates: Nominal vs Real

Nominal exchange rate

The price of domestic currency in terms of foreign currency (e.g., rand per dollar). If the rand weakens, the nominal exchange rate changes.

Real exchange rate

Adjusts for relative price levels. Real exchange rate determines competitiveness.

Exam emphasis: A depreciation can raise domestic inflation if the country imports many goods whose prices are set in foreign currency.

4.3 Foreign Capital Flows and Interest Rate Differentials

Foreign investors consider:

• expected returns
• currency risk
• interest rates in domestic vs foreign assets

If South African interest rates rise relative to global rates, capital inflows may increase, supporting the currency. However, higher rates also reduce domestic borrowing and investment, affecting AD.

4.4 Balance of Payments: The Intuition (Not Just Definitions)

Intro macro often treats the balance of payments (BoP) as a set of accounts recording transactions with the rest of the world:

• Current account (trade in goods/services, income receipts/payments, transfers)
• Capital/financial account (investment flows, portfolio flows)

A sustained imbalance can show up through exchange rate pressure, reserve changes, or borrowing from abroad.

Exam move: If net exports decline persistently (NX falls), it can worsen the current account unless offset by financial inflows.

4.5 How External Shocks Affect AD–AS Outcomes

Example: Global commodity price increase

Suppose world oil prices rise:

• Import costs increase.
• Firms’ production costs rise → SRAS shifts left.
• Consumer prices rise → inflation.
• Domestic output may fall.

This resembles a negative supply shock. Even if the government tries to stimulate demand, inflation may remain because the supply constraint is real.

Example: Weak global demand

If external demand for exports falls:

• Exports decline → AD shifts left (through lower NX).
• Output falls.
• Inflation may decrease or be mixed depending on exchange rate and supply conditions.

4.6 Exchange Rate Pass-Through to Inflation

A common real-world statement is: “depreciation increases imported inflation.” This happens because:

• imported goods become more expensive in domestic currency
• imported inputs increase firms’ costs
• firms pass on part of costs into consumer prices

Exam nuance: pass-through is not always 100%; it depends on:

• how competitive markets are
• pricing strategies
• wage bargaining dynamics
• import share in consumption and production

4.7 Putting It Together: A Coherent Scenario Answer

Scenario: The rand depreciates significantly. Assume imports become more expensive.

Possible effects:

1. SRAS left (cost-push).
2. AD: depends. Net exports may improve because exports become relatively cheaper to foreigners, but higher import prices can also reduce consumption and real income. Net effect varies.
3. Inflation rises due to cost and demand effects.
4. Output may fall if supply constraints dominate or if high inflation leads to reduced real purchasing power.

High-scoring exam answer structure:

• Identify the depreciation as a shock channel.
• Decide whether the dominant effect is demand or supply.
• Use AD–AS to show direction of both output and price level.

5) Exam Preparation Toolkit: Graph Mastery, Model Selection, Practice Questions, and South African Policy Reasoning

This section is an applied toolkit to help you perform well on ECO 102 tests and exams. It focuses on graph interpretation, selecting the correct model, writing structured answers, and practicing the kinds of quantitative and qualitative reasoning commonly used in South African university and TVET assessments.

5.1 Model Selection: Which Framework Fits Which Question?

A frequent student error is using the wrong model for the shock described. Use this decision guide.

If the question emphasizes changes in spending, taxes, government purchases, or interest rates:

• Use AD–AS (AD shifts) or Keynesian cross (short-run equilibrium spending).

If the question emphasizes changes in input costs, energy, wages, or productivity:

• Use AD–AS (SRAS shifts).

If the question emphasizes long-run capacity, “potential output,” or structural growth:

• Use LRAS and long-run adjustment logic (classical view elements).

If the question emphasizes exchange rates, imports, exports, or world prices:

• Use the external sector logic feeding into AD and/or SRAS.

5.2 Graph Skills: How to Read and Draw Correctly

AD–AS graph essentials

You must be able to do the following quickly:

1. Draw axes: Price level (vertical) and Real GDP/output (horizontal).
2. Draw LRAS vertical at potential output.
3. Draw SRAS upward sloping.
4. Draw AD downward sloping.

Shifts vs movements

• A change in the price level leads to movement along AD (a change in quantity of output demanded).
• A change in determinants of AD shifts AD.

Similarly:

• A change in price level moves along SRAS.
• A change in costs/productivity shifts SRAS.

Exam tip: Many marks are awarded (or lost) for correct shift vs movement language.

5.3 Writing High-Scoring Explanations (Not Just Correct Directions)

Examiners often grade reasoning quality. Use a three-sentence micro-structure:

1. State the shock and its effect on AD/SRAS.
2. State equilibrium changes: output and price level directions.
3. State adjustment or policy implications: short-run vs long-run.

Example (demand shock):
“An increase in government spending raises planned aggregate expenditure, shifting AD right. The new short-run equilibrium has higher real output and a higher price level. Over time, price/wage adjustments reduce demand pressure, returning output toward potential output while inflation remains higher.”

5.4 Worked Practice: Keynesian Cross Multipliers

Below are practice problems typical of intro macro tests. Focus on process.

Problem 1

MPC = 0.6. Autonomous government spending increases by R300 million. Find change in equilibrium output.

1. Multiplier = 1/(1−0.6)=1/0.4=2.5
2. Change in output = 2.5 × 300 = R750 million

Problem 2 (interpretation)

If MPC rises from 0.6 to 0.8, what happens to the multiplier?

• Multiplier at 0.6 = 2.5
• Multiplier at 0.8 = 1/(1−0.8)=5
  So output becomes more responsive. Higher MPC means induced consumption is stronger.

Exam interpretation line: “When households spend a larger share of additional income, expansionary fiscal policy has a larger effect on equilibrium output.”

5.5 Worked Practice: AD–AS Supply Shock

Problem 3 (qualitative)

Assume a negative supply shock reduces productivity and increases input costs.

• SRAS shifts left
• Output decreases in the short run
• Price level increases

Long run: output returns toward potential (LRAS fixed), but the final price level may be higher than initial.

Problem 4 (policy reasoning)

If SRAS shifts left due to cost increases, why might expansionary fiscal policy worsen inflation?

Because output is constrained by higher costs; increasing demand can lead to higher prices rather than higher real production. In AD–AS terms, demand stimulation with left-shift SRAS raises inflation risk.

5.6 South Africa-Focused Essay Prompts and Model Answers (Frameworks)

Even if your course does not require the exact numbers for South Africa, exams often ask you to discuss policy dilemmas relevant to the national context: unemployment, inflation pressures, energy constraints, and fiscal sustainability.

Prompt A: “Explain how a rise in global oil prices can affect output and inflation.”

Answer framework:

1. Global oil price ↑ → domestic import costs ↑
2. Higher costs → SRAS left
3. SRAS left → output ↓, price level ↑
4. If depreciation occurs simultaneously → additional cost-push → inflation ↑
5. Policy options: short-run inflation stabilization may require monetary tightening, while long-run solutions include energy efficiency and diversification.

Prompt B: “Discuss the effects of increased government spending financed by borrowing.”

Answer framework:

1. G ↑ → AD right (short run output ↑, price level ↑)
2. If borrowing increases interest rates → crowding out possible (I ↓)
3. Net effect depends on labour market slack and monetary policy response
4. In long run, output returns to potential unless supply capacity improves via public investment in infrastructure/human capital.

Prompt C: “How can unemployment persist even when GDP grows?”

Answer framework:

1. Structural unemployment: skills mismatch persists
2. Growth may be concentrated in sectors that do not absorb labour
3. Labour market frictions: job search and relocation costs
4. Policy: training, education, labour market reforms, sector strategies

Exam mark booster: Always tie the explanation to the macro mechanism (not just the definition).

5.7 Numerical Set You Should Be Able to Handle Quickly

Even intro modules sometimes include light calculations. Practice these patterns:

Pattern 1: Inflation rate from CPI values

If CPI rises from 120 to 126:
[
\frac{126-120}{120}\times 100 = \frac{6}{120}\times 100 = 5%
]

Pattern 2: Real interest rate approximation

Nominal rate = 11%, inflation = 7% → real ≈ 4%.

Pattern 3: GDP components

If C=R3 200, I=R800, G=R1 000, X=R900, M=R1 100:
[
\text{GDP} = 3200 + 800 + 1000 + (900-1100) = 5000 – 200 = 4800
]
So GDP = R4 800.

(Numbers here are sample values for practice. If your exam uses different values, follow the same formula.)

5.8 Common Mistakes That Cost Marks

1. Confusing movement with shift (e.g., saying “AD moves right because price increases”).
2. Using LRAS as sloping (in many intro versions, LRAS is vertical).
3. Ignoring long-run adjustment in AD–AS questions (if asked for short run vs long run).
4. Not stating both output and price effects (some answers mention one only).
5. Mixing nominal and real concepts (e.g., discussing GDP growth without specifying whether it’s real).
6. Weak mechanism explanations (stating “unemployment falls” without linking to output and labour demand).

5.9 Timed Study Plan for ECO 102 (Practical and Realistic)

A balanced plan helps you master both concepts and graphs.

Week-style routine (repeatable across semesters)

• Day 1: Review GDP/inflation/unemployment measurement; write short definitions.
• Day 2: Graph practice for AD shifts and outcomes.
• Day 3: Keynesian cross multiplier calculations; do at least 6 numeric problems.
• Day 4: SRAS shifts: input costs, productivity; explain in words.
• Day 5: AD–AS combined scenarios (demand vs supply shock comparisons).
• Day 6: Policy essays: monetary vs fiscal, plus trade-offs.
• Day 7: Mixed quiz: 10 short questions + 1 long structured essay.

Consistency beats cramming, especially for graph interpretation.

5.10 Final Checklist Before Writing Any Exam Answer

Use this checklist mentally:

• Which model? Keynesian cross, classical logic, or AD–AS?
• Is it demand or supply? Identify the shock source.
• What direction shifts? AD right/left, SRAS right/left.
• What happens to output? Up or down relative to potential.
• What happens to prices? Up or down relative to initial.
• Is long-run adjustment needed? Mention return toward potential if relevant.
• Any South Africa policy tie-in? Keep it mechanism-based: unemployment, energy constraints, inflation pressures, exchange rate pass-through.

Concluding Mastery Statement (What ECO 102 Tests)

ECO 102 is ultimately testing whether you can think like a macroeconomist: link real-world events to aggregate behavior, use correct models, interpret and draw graphs, compute simple macro measures when given data, and write explanations that show the chain of cause and effect. When you answer with: shock → shift → equilibrium change → short-run vs long-run adjustment → policy implication, you align with how marks are typically awarded.

If you want, I can also generate a set of practice exams (multiple-choice + short answers + essays) tailored to the exact question style used at your specific institution (university vs TVET) and your lecturer’s emphasis (more AD–AS vs more Keynesian cross vs more policy).