EKN 234 (Macroeconomics 234) is typically a second/third-year macroeconomics module that builds a deeper understanding of how economies function in the aggregate—output, inflation, unemployment, money and banking, exchange rates, trade, fiscal/monetary policy, and the dynamics that connect short-run and long-run outcomes. This study guide is tailored for South African learners using University of Pretoria (UP) BCom Economics-style framing and exam expectations, with clear theory, worked examples, and exam-ready structure.

The guide is organised into five substantial sections: (1) core macro models and measurement; (2) aggregate demand/supply and policy; (3) national income, Keynesian cross, and IS–LM intuition; (4) money, inflation, Phillips curve, and expectations; and (5) open-economy macro, exchange rates, and trade policy—each with practice-style scenarios and consistency checks.

Section 1: Macroeconomic Measurement and Foundations of EKN 234

Macroeconomics starts with measurement: how we quantify “the economy” and its movements. In EKN 234, you are expected to know not only formulas, but also the logic behind them: what variables mean, how they are linked, which assumptions are used, and where measurement can mislead.

1.1 Key Macro Variables and Why They Matter

At the macro level, you mainly track:

Real output (Real GDP / Real Y): production adjusted for inflation.
Nominal output (Nominal GDP / Nominal Y): production valued at current prices.
Inflation (π): typically measured by CPI or similar price indices.
Unemployment rate (u): fraction of labour force without work but available and seeking work.
Interest rates (i or r): “price of money,” central in monetary policy.
Money supply (M) and money demand: determines price level dynamics.
Exchange rate (e): price of domestic currency in terms of foreign currency (or vice versa, depending on convention).
Government budget outcomes: spending (G), taxes (T), deficits/surpluses.
Trade balance: exports (X), imports (M^im), and net exports (NX).

Exam skill: when asked “why inflation might rise,” a good answer always connects multiple channels: output gaps, aggregate demand shocks, monetary growth, expectations, and/or supply shocks.

1.2 Nominal vs Real: A Consistency Anchor

A frequent exam question checks whether students confuse nominal and real variables. Use this core relationship:

GDP deflator / price level (P):
- Nominal GDP = Real GDP × Price level
- ( Y_{nom} = P \cdot Y_{real} )

The growth and inflation logic often appears as:

Inflation approx equals the growth rate of the price level
Real growth depends on output changes after removing inflation

Worked example (exam-style):

Suppose Real GDP rises from 100 to 104 (a 4% real increase), and the price level rises from 2 to 2.1 (a 5% inflation increase).

Real growth = ((104-100)/100 = 4%)
Nominal GDP changes from (2\times100=200) to (2.1\times104=218.4)
Nominal growth = ((218.4-200)/200 = 9.2%)

Students often incorrectly say nominal growth = real growth + inflation exactly; the precise figure is close when changes are small, but you should compute when asked.

1.3 Measuring Inflation: CPI, Headline vs Core, and Index Choices

In South Africa, inflation is usually discussed through CPI measures. Macro exams may not require you to memorise exact CPI weights, but you should understand:

Headline inflation: total basket price changes
Core inflation (conceptual): excludes volatile components (e.g., some food/energy) to reveal underlying trends
Producer inflation vs consumer inflation: PPI vs CPI (context dependent)

How it appears in answers:

If inflation is driven by an oil price shock (imported cost push), headline inflation rises quickly, while core may respond more slowly.
If inflation persists beyond temporary shocks, monetary policy and expectations become key.

1.4 Unemployment Concepts: Cyclical vs Structural vs Frictional

Unemployment is not one number. You must know the components:

Frictional unemployment: time spent job-searching.
Structural unemployment: mismatch between skills and jobs.
Cyclical unemployment: changes over the business cycle, usually linked to aggregate demand.

EKN 234 often uses unemployment to link:

Output deviations (output gap) → unemployment deviations (Okun’s law logic)
Wage bargaining → inflation dynamics
Labour market rigidity → natural rate / NAIRU concept

1.5 Potential Output and the Output Gap

A cornerstone of modern macro analysis is:

Potential output (Y*): maximum sustainable output given labour, capital, technology, and normal utilisation.
Output gap: ( Y – Y^* )

If Y > Y*, capacity constraints and stronger demand tend to pressure inflation upward. If Y < Y*, inflationary pressures ease, though structural rigidities can delay the adjustment.

Exam-ready phrasing:

“When the output gap is positive, demand-driven inflation pressures increase.”
“When negative, disinflationary dynamics occur, but unemployment may remain elevated if labour markets adjust slowly.”

1.6 Measuring the External Sector: Current Account, Trade Balance, and Capital Flows

Macroeconomics becomes more complicated in open-economy settings. You should understand:

Exports (X) and imports (M^im) determine net exports (NX = X – M^im).
The current account includes trade plus net income and transfers.
Capital account / financial flows and interest differentials affect exchange rates.

A common exam theme:

A country running a current account deficit might still be financing it through capital inflows.
Exchange rate movements can either correct deficits (through competitiveness) or worsen them (through import prices).

1.7 National Accounts Identities: The Big Picture

A set of identities are used across the module:

GDP by expenditure:
[
Y = C + I + G + NX
]
where:

(C) = consumption
(I) = investment
(G) = government spending
(NX = X – M^im)

Savings–investment identity (closed economy):
[
S = I
]
and with government:
[
S_{private} + S_{public} = I
]
Open economy relation (conceptual):
[
NX = S – I
]
A deficit (negative NX) implies investment exceeds savings domestically.

Why it matters for EKN 234:
In policy questions, you often translate “fiscal stimulus” into effects on consumption, investment crowding out, and net exports. The identities keep your reasoning consistent.

1.8 Short-Run vs Long-Run: The Critical Macro Distinction

Most exam questions ask you to explicitly state:

Short run: prices/wages may be sticky; output adjusts.
Long run: variables return to potential levels; inflation adjusts.

This is vital in policy evaluation:

Monetary expansion may raise output temporarily (through lower real interest rate) but should affect inflation more permanently.
Fiscal policy may have different effects depending on how interest rates and crowding out operate.

Section 2: Aggregate Demand, Aggregate Supply, and Macroeconomic Policy in Practice

In EKN 234, aggregate demand (AD) and aggregate supply (AS) models are used as a bridge between micro price rigidities and macro outcomes. You must be able to draw/describe AD-AS effects and connect them to real policies: fiscal and monetary.

2.1 Aggregate Demand (AD): What Shifts It?

In a simplified macro framework, aggregate demand depends on the components of GDP and financial conditions. Common drivers include:

Consumption (C): affected by disposable income, wealth, consumer confidence.
Investment (I): affected by interest rates, expected returns, uncertainty.
Government spending (G): fiscal policy.
Net exports (NX): affected by exchange rates, global demand, and trade restrictions.

In an exam answer, you often need two types of AD shifts:

Demand shock (positive):
- increases spending → higher output and higher price level in the AD-AS model.
Demand shock (negative):
- reduces spending → lower output and lower price level.

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

AS differs depending on the time horizon.

Short-run aggregate supply (SRAS):
- output responds to price level changes,
- reflecting sticky wages/prices.
Long-run aggregate supply (LRAS):
- output equals potential (Y^*),
- in long run, output returns to potential regardless of price level.

A key conceptual statement:

In the long run, AD shocks primarily affect inflation/price level, not real output (assuming flexible adjustment).

2.3 Policy Framework: Fiscal Policy

Fiscal policy uses government spending (G) and taxes (T). The standard logic:

Increase in (G) raises aggregate demand.
Increase in (T) reduces disposable income → lowers consumption → reduces AD.
Budget deficits matter because they can influence interest rates and borrowing costs.

Worked example: fiscal stimulus and crowding-out logic

Suppose a closed economy has GDP identity:
[
Y = C + I + G
]
and consumption:
[
C = a + b(Y – T)
]
Investment depends negatively on interest rate, but interest rate is determined by money market (you may later use IS–LM). In a qualitative exam, the steps are:

Higher (G) increases desired spending → raises (Y).
Higher (Y) raises income → increases money demand (if income affects demand).
Money demand rise with fixed money supply tends to raise interest rate.
Higher interest rate reduces investment (I).
Net effect on output depends on how strong investment crowding out is compared to fiscal expansion.

Exam-marking tip:

If the question is “discuss,” you must mention both:
- direct AD shift (positive)
- possible crowding out (negative)
- possible multiplier effects (how much output responds)

2.4 Policy Framework: Monetary Policy

Monetary policy usually operates via:

Central bank changes policy interest rate (which influences money market conditions)
Or changes money supply (M) directly (less common but conceptually important)

Monetary expansion often:

lowers interest rates,
increases investment and consumption (via real borrowing costs and wealth effects),
increases AD.

Counter-argument (important for top marks):

If inflation expectations are unanchored, monetary expansion can translate into higher inflation without much output gain. In that case, the short-run output effect might be weaker, and inflation effect stronger.

2.5 Policy Tradeoffs: Inflation vs Output Stabilisation

In AD-AS analysis:

If the economy is in recession (Y below potential), expansionary policy (fiscal/monetary) shifts AD right.
If the economy is overheated (Y above potential), contractionary policy may be used to reduce AD.

However, real-world implementation involves:

lags: policy affects the economy with delays.
uncertainty: multipliers and transmission mechanisms are not constant.
credibility: expectations can reduce or enhance effectiveness.

2.6 A Detailed Scenario: Demand Shock Under SRAS and LRAS

Consider an economy initially at:

output (Y = Y^*),
inflation stable.

Now assume a positive demand shock increases AD (e.g., external demand increases exports).

In SRAS/LRAS terms:

AD shifts right.
In the short run:
- output rises above potential ((Y > Y^*)),
- price level rises.
Over time:
- if wages/prices adjust upward,
- SRAS shifts left or LRAS output reasserts potential,
- output returns to (Y^*),
- price level remains permanently higher (in the model’s logic).

Exam answers should explicitly mention:

short-run output increase,
long-run output unaffected,
inflation level permanently higher.

2.7 Supply Shocks: Cost Push and Uncertainty

Not all macro shocks are demand shocks. Supply shocks come from:

oil price increases (imported input costs),
wage increases,
productivity changes,
adverse weather affecting food prices (relevant for inflation data).

In AD-AS:

A negative supply shock shifts SRAS left.
Outcome: lower output and higher price level (stagflation-like pattern).

This is where students often struggle because it contradicts the typical “AD right increases output and reduces unemployment” logic. In supply shocks, unemployment can rise even as inflation rises.

2.8 Policy Under Supply Shocks: The “Hard Choice”

If inflation rises due to negative supply shocks:

contractionary policy might reduce demand and help control inflation,
but risks deepening recession.

If central bank focuses solely on inflation, output may fall more than necessary. If it focuses solely on output, inflation may persist.

High-scoring exam responses discuss:

tradeoff magnitude depends on the persistence of supply shock,
expectations and credibility,
how quickly wages adjust.

Section 3: National Income, Keynesian Cross, and IS–LM Foundations (with Worked Calculations)

This section builds the heart of many EKN 234 exam questions: using the circular flow and equilibrium logic to derive relationships between output, income, interest rates, and spending. You should be comfortable with step-by-step computations.

3.1 Circular Flow Logic and the Expenditure Approach

The income/expenditure perspective uses:
[
Y = C + I + G + NX
]
For a closed economy (or if NX is temporarily ignored), simplify:
[
Y = C + I + G
]

Consumption function is usually:
[
C = a + b(Y – T)
]
where:

(a) is autonomous consumption,
(b) is marginal propensity to consume (MPC),
(T) taxes (may be lump-sum in simplified models).

Investment function often takes the form:
[
I = \bar{I} – \alpha i
]
where:

(i) is interest rate,
higher interest reduces investment.

In more advanced questions, you may treat money market and use IS–LM logic. Even if not fully required, you must understand the direction of effects.

3.2 Keynesian Cross: The Simple Multiplier Mechanism

The Keynesian cross focuses on equilibrium where actual output equals planned spending.

Planned expenditure:
[
E = C + I + G
]
Equilibrium:
[
Y = E
]

Substitute:

(C = a + b(Y-T))

So:
[
Y = a + b(Y-T) + I + G
]
Solve for Y:
[
Y = a + bY – bT + I + G
]
[
Y – bY = a – bT + I + G
]
[
Y(1-b) = a – bT + I + G
]
[
Y = \frac{1}{1-b}\left(a – bT + I + G\right)
]

This yields the multiplier:
[
k = \frac{1}{1-b}
]
A higher MPC (b) means larger multiplier.

Worked numerical example (Keynesian cross)

Let:

(a = 50)
(b = 0.8)
(T = 20)
(I = 40)
(G = 30)

Compute equilibrium output:
[
Y = \frac{1}{1-0.8}\left(50 – 0.8(20) + 40 + 30\right)
]
First:

(1-b = 0.2)
(50 – 0.8(20) = 50 – 16 = 34)
So:
[
Y = \frac{1}{0.2}(34 + 40 + 30)=5 \times 104 = 520
]

Interpretation: with MPC 0.8, a strong response in consumption magnifies spending changes.

3.3 Multiplier for Government Spending vs Taxes

Government spending multiplier:
[
\Delta Y = \frac{1}{1-b}\Delta G
]
Tax multiplier:
since taxes reduce disposable income:
[
\Delta Y = -\frac{b}{1-b}\Delta T
]

With (b = 0.8):

Spending multiplier:
[
k_G = \frac{1}{0.2} = 5
]
Tax multiplier:
[
k_T = -\frac{0.8}{0.2} = -4
]

Worked example:

If (G) rises by 10:
[
\Delta Y = 5 \times 10 = 50
]
If (T) rises by 10:
[
\Delta Y = -4 \times 10 = -40
]

Exam clarity: both are based on the same consumption function; only the coefficients differ.

3.4 Introducing Interest Rates: Investment Changes and the IS Idea

In Keynesian cross, investment may be treated constant. In IS–LM style problems, investment depends on interest:

If interest rate increases, investment decreases → planned spending decreases → equilibrium output declines.

You might model:
[
I = \bar{I} – \alpha i
]

Then equilibrium output:
[
Y = C + I + G
]
and (C) depends on Y. After substitution and solving, you get a negative relationship between i and Y:

higher interest → lower investment → lower Y.

This is the essence of the IS curve:

IS shows combinations of i and Y where goods market equilibrium holds.

3.5 IS–LM Intuition (without overcomplicating)

The module often expects you to explain equilibrium as:

IS (goods market): equilibrium where planned spending equals output.
LM (money market): equilibrium where money supply equals money demand.

Money demand is often:
[
\frac{M}{P} = L(i, Y)
]
with:

(L) increasing in Y (more transactions money demand),
(L) decreasing in i (higher interest makes holding money less attractive).

In exam answers:

If money supply increases, at given i people hold more money than desired → they try to buy bonds → interest rates fall → investment rises → output rises.
If interest rises, money demand falls → money market clears at a higher i with lower money demand via lower Y or higher i effects.

3.6 A Worked Two-Equation Example (conceptual calculation)

Assume:

Goods market: (Y = 200 + 0.6(Y-T) + I) (you would normally structure it differently, but the goal is solving)
Investment: (I = 50 – 10i)
For simplicity, take (T = 50), and government spending included in the constant term.

Let’s craft a consistent simplified model:

Goods market:
[
Y = C + I + G
]
Let:
[
C = 100 + 0.8(Y-T)
]
with (T=50) so:
[
C = 100 + 0.8(Y-50)=100 + 0.8Y – 40 = 60 + 0.8Y
]
Let:

(I = 50 – 10i)
(G = 30)

Then:
[
Y = (60 + 0.8Y) + (50 – 10i) + 30
]
[
Y = 140 + 0.8Y – 10i
]
[
Y – 0.8Y = 140 – 10i
]
[
0.2Y = 140 – 10i
]
[
Y = 700 – 50i
]
That’s the IS relation: higher i lowers Y.

Money market (LM simplified):
[
\frac{M}{P} = Y – 10i
]
Suppose real money supply is fixed at:
[
\frac{M}{P} = 200
]
Then:
[
200 = Y – 10i
]
[
Y = 200 + 10i
]
Now solve intersection:
[
700 – 50i = 200 + 10i
]
[
700 – 200 = 60i
]
[
500 = 60i
]
[
i = \frac{500}{60} = 8.333\ldots
]
Then:
[
Y = 200 + 10(8.333\ldots)=200 + 83.333\ldots=283.333\ldots
]

How this helps exams:
Even if the exact equations differ from your exam, the approach is consistent:

derive IS (Y as function of i),
derive LM (Y as function of i),
set equal to solve i and Y.

3.7 Policy Experiments in IS–LM Logic

Once equilibrium is found, you should predict changes:

Expansionary fiscal policy (increase G)

IS shifts right (at each i, goods market equilibrium requires higher Y).
New equilibrium: higher Y and higher i (depending on LM slope).

If asked “why interest rate rises?”
Because higher Y increases money demand, which raises interest rates until money market clears.

Expansionary monetary policy (increase M)

LM shifts right (at each i, higher real money supply supports higher money holdings; to clear, i tends to fall).
New equilibrium: higher Y and lower i.

In real exams, you must also mention:

stronger effects when LM is flatter (money demand less sensitive to i) and when IS is steeper (Y strongly responds to i via investment).

3.8 Linking to Unemployment and the Output Gap

If output rises above potential, unemployment falls with a lag (and possibly inflation rises). In a Keynesian model:

unemployment depends on labour demand,
output changes lead to employment changes.

However, for top marks you add:

if productivity or labour market rigidity slows adjustment, unemployment might not fall as expected.
if inflation expectations are affected, policy effectiveness changes.

Section 4: Money, Inflation Dynamics, Phillips Curve, and Expectations

This section develops the macro mechanisms connecting money supply, price level movements, and unemployment/inflation tradeoffs. Expect both diagrams and explanation: why inflation persists, why expectations matter, and how policy credibility affects outcomes.

4.1 Money: Definitions and the Quantity Theory Skeleton

Money typically functions as:

medium of exchange
unit of account
store of value

In macro, the simplest anchor is the quantity theory idea:
[
MV = PY
]
where:

M = money supply
V = velocity
P = price level
Y = real output

In growth rate terms (approximate):
[
\Delta M + \Delta V \approx \pi + \Delta Y
]
If V and Y are stable in the short run, faster money growth leads to higher inflation.

Exam emphasis:

The relationship between money growth and inflation depends on the stability of velocity and the output response.
If money growth rises but output also rises strongly, inflation might not rise proportionally immediately.

4.2 Money Market and Interest Rates: Transmission Channels

In IS–LM and other frameworks:

Central bank increases money supply → lowers i (or changes bond prices).
Lower i → stimulates investment spending (especially interest-sensitive sectors).
Higher spending raises output Y.
In SRAS/LRAS, higher Y may push up inflation.

But if the economy is at/near potential and supply is constrained:

output cannot rise sustainably,
inflation dominates.

4.3 Inflation Persistence: Why “One-Off” Shocks Can Become “Trends”

Inflation persistence arises from:

indexation (wages and contracts adjust with inflation),
expectations: if firms expect inflation, they raise prices pre-emptively,
monetary policy credibility: if central bank is seen as accommodative, expectations stay high.

A negative supply shock (e.g., food price rise) can raise headline inflation. Whether it becomes persistent depends on:

how quickly wages adjust,
whether policy tightens demand to prevent second-round effects.

4.4 Phillips Curve: Tradeoff and Its Evolution

The classic Phillips curve links unemployment (u) and inflation (π). In simplified form:

When unemployment is low, inflation tends to be higher.
When unemployment is high, inflation tends to be lower.

But modern treatments incorporate expectations. A common structure is:

Short-run Phillips curve:
[
\pi = \pi^e – \beta(u – u^*)
]
Where:
( \pi^e ) is expected inflation,
(u^*) is natural rate / NAIRU.

This implies:

If expectations are higher, inflation increases for any given unemployment.
The long-run Phillips curve is vertical at (u^*): unemployment returns to natural rate in the long run.

4.5 NAIRU / Natural Rate: The Exam Logic

You should be able to explain:

Unemployment at which inflation is stable.
If unemployment is below NAIRU, inflation rises over time.
If above NAIRU, inflation falls.

Important nuance:
NAIRU can change due to structural factors:

labour market policies,
union bargaining strength,
unemployment benefits design,
matching efficiency.

4.6 Expectations and Policy Credibility: Adaptive vs Rational Expectations (Conceptually)

If expectations are formed adaptively, people “learn” from past inflation:

policy that reduces inflation slowly can reduce expectations gradually.

If expectations are formed rationally (or forward-looking):

credible policy can reduce inflation expectations quickly,
making disinflation less costly in output.

Even if your module uses a specific textbook style, the general exam idea remains:

credibility affects the slope and location of the Phillips curve.

4.7 A Quantitative Expectations Phillips Curve Example

Suppose:

expected inflation ( \pi^e = 6% ),
(\beta = 2),
natural unemployment (u^* = 5%).

Short-run Phillips curve:
[
\pi = 6% – 2(u – 5%)
]

If unemployment is (u = 4%):
[
\pi = 6% – 2(4% – 5%) = 6% – 2(-1%) = 6% + 2% = 8%
]

If unemployment is (u = 6%):
[
\pi = 6% – 2(6% – 5%) = 6% – 2(1%) = 4%
]

This example illustrates:

deviations of unemployment from NAIRU shift inflation.

4.8 Stabilisation Policy and the Cost of Disinflation

If policy aims to reduce inflation from 8% to 6%:

It may require unemployment above NAIRU temporarily.
Over time, lower inflation reduces expected inflation ( \pi^e ) and shifts the Phillips curve down.

Exams often ask you to discuss:

Why disinflation can be painful (unemployment rises)
Why it can become less painful with credibility and well-anchored expectations

4.9 Linking to Real Economy: Wages, Productivity, and Supply Constraints

Inflation is not only monetary. Labour cost pressures matter:

If wages rise due to bargaining, and productivity doesn’t keep up, inflation rises.
Productivity improvements shift supply right, lowering inflation.

Therefore, the “best policy” depends on what drives inflation:

demand-driven inflation → contraction helps
cost-driven inflation → supply-side measures matter too, not only contraction

4.10 South African Relevance (Exam Contextualisation)

In South African discussions (as in many developing-economy contexts), inflation may be influenced by:

imported inflation via exchange rate movements,
electricity and logistics shocks affecting production costs,
food price volatility.

In an exam scenario, if the question includes a description like “currency depreciates leading to higher import prices,” treat it as an external cost/inflation shock. Then explain:

immediate price rise,
possible second-round effects,
policy response: how much to tighten demand to prevent inflation persistence.

Section 5: Open-Economy Macroeconomics—Exchange Rates, Trade, and Policy Responses

Most EKN 234 macro exams include open-economy elements: exchange rates, net exports, capital flows, and policy spillovers. This section consolidates how exchange rate changes interact with AD-AS, inflation, and the balance of payments.

5.1 The Balance of Payments Basics: Current Account and Capital Flows

At minimum, you should be able to describe:

Current account includes net trade in goods/services plus net income and transfers.
Capital/financial flows can finance deficits or fund surpluses.

A current account deficit means:

the country imports more than it exports (in trade terms),
it needs capital inflows (or reduces reserves) to finance that gap.

5.2 Exchange Rate Concepts: Nominal vs Real Exchange Rate

Exchange rate can be defined as:

nominal exchange rate: domestic currency per unit of foreign currency (e.g., ZAR per USD) or the inverse depending on convention
real exchange rate adjusts for relative price levels

A depreciation (domestic currency weakens) typically:

raises the domestic currency price of imports,
makes exports relatively cheaper to foreigners (depending on price elasticities),
affects inflation through import costs.

Exam answer structure:

Depreciation increases import prices → inflation pressure.
Depreciation changes net exports:
- NX tends to improve if export demand elasticities are high enough,
- but with a trade balance “J-curve” in the short run.

5.3 Net Exports and the AD Link

In GDP identity:
[
Y = C + I + G + NX
]

If exchange rate depreciation improves NX, AD shifts right (from a demand perspective). But inflation may rise, which in AD-AS affects:

output in short run (depends on SRAS slope),
price level more directly in both short and long run.

So exchange rate policy effects are ambiguous in the short run:

AD increase may raise output,
but inflation increase may worsen real income and prompt tighter monetary response.

5.4 Capital Flows and Interest Rate Parity Intuition

Without going too deep into international finance formulas, you need the conceptual rule:

Higher domestic interest rates attract capital inflows.
Capital inflows strengthen the currency (all else equal).
This can offset the depreciation effect.

In many exam treatments, interest differentials link to exchange rate expectations:

if investors expect future depreciation, they may not be attracted by higher nominal rates unless the expected return compensates.

5.5 Exchange Rate Depreciation: Short-Run vs Medium-Run Effects

You should be able to discuss a timeline:

Short run

Import prices rise quickly → inflation rises.
NX response may be weak at first because contracts and consumption adjustments take time.

Medium run

Consumers switch to domestic substitutes more.
Firms adjust sourcing and production.
Exports become relatively more competitive, NX improves.

Policy implication:

a depreciation can help the trade balance over time but can raise inflation immediately, especially for import-dependent economies.

5.6 A Worked Open-Economy AD-AS Scenario

Assume:

Economy is at potential output initially (Y=Y^*).
A negative supply shock increases SRAS left (cost push), raising inflation and lowering output.

Now suppose simultaneously the currency depreciates, increasing import prices and causing:

further inflation pressure,
potential increase in NX (AD partly right), but limited.

Exam answer must clearly separate channels:

Supply shock: SRAS shifts left → output down, price level up.
Depreciation:
- raises import costs → reinforces price level (supporting left pressure indirectly),
- improves NX → shifts AD right somewhat.

The combined effect could be:

output still falls (because SRAS effect dominates),
inflation rises (because both effects push prices up).

This type of “mixed shock” question tests whether you can superimpose shifts without confusing the model’s structure.

5.7 Policy Under Exchange Rate Pressure

If inflation rises due to currency depreciation and cost-push factors, policymakers face:

tightening monetary policy (raises i, supports currency stability, reduces demand but increases recession risk),
fiscal restraint (reduces AD but might have distributional consequences),
supply-side measures (electricity reliability, logistics improvements, import diversification, competition policy).

In exams, a high-quality response includes:

demand management to reduce second-round inflation,
credibility of central bank,
targeted interventions to avoid worsening poverty through broad cuts.

5.8 Trade Policy: Tariffs, Quotas, and the AD–NX Effect

A tariff raises the domestic price of imports. Effects:

NX may improve due to reduced imports (at least initially).
Consumers and firms face higher input costs → could raise inflation and reduce output.
Retaliation by trading partners could reduce exports.

Therefore, trade policy is not purely positive for output. In a well-developed answer, mention:

elasticity of import demand,
share of imported inputs in production,
exchange rate response,
impact on inflation.

5.9 Policy Coordination and Spillovers

Open-economy macro includes:

foreign interest rate changes affecting exchange rates,
global recession reducing exports,
commodity price shocks (especially for commodity-dependent economies).

If a country relies heavily on imported energy or food, external shocks can generate inflation and output effects simultaneously.

Exam answer strategy:

Identify the source of shock (demand vs supply, domestic vs foreign).
Use the correct direction of shifts in AD-AS and the likely inflation transmission.

5.10 Consistency Practice: Building a Coherent Exam Calculation

Sometimes exams present a data table and ask you to interpret. A strong approach is to compute consistently using identities and percentages.

Example dataset (consistent and illustrative)

Assume the following for a simplified economy:

Consumption (C = 600)
Investment (I = 200)
Government spending (G = 250)
Exports (X = 300)
Imports (M^{im} = 350)

Then:
[
NX = X – M^{im} = 300 – 350 = -50
]
Aggregate output:
[
Y = 600 + 200 + 250 – 50 = 1000
]

Now suppose the currency depreciates and imports fall due to higher prices:

imports drop from 350 to 320,
exports remain constant at 300.

New NX:
[
NX = 300 – 320 = -20
]
New output:
[
Y = 600 + 200 + 250 – 20 = 1030
]

Interpretation:

NX improves by 30, raising output by 30 under the assumption that C, I, and G remain unchanged in this simplified scenario.

Exam caveat:
In a real macro model, depreciation also raises inflation and may affect consumption/investment via real purchasing power and interest rate changes. But for identity-based questions, clarity about assumptions is what earns marks.

South African University/TVET-Style Exam Preparation Checklist (EKN 234 Focus)

To match how South African universities and TVETs often assess macro modules, your final revision should look like this:

1) Diagram Mastery

Be able to:

explain AD-AS shifts for demand and supply shocks,
explain Phillips curve shifting with expectations,
describe IS-LM movement for fiscal vs monetary policies,
interpret how exchange rate depreciation changes NX and inflation.

2) Consistent Use of Definitions

In any short answer:

define terms once (e.g., potential output, NAIRU, inflation expectations),
then apply them to the scenario.

3) Step-by-Step Calculations

When asked to compute equilibrium:

write equations (consumption, investment, money market),
substitute carefully,
solve algebraically,
interpret the sign and magnitude.

4) Policy “Discuss” Answers

A top response always includes:

the intended effect,
possible unintended consequence,
assumptions or conditions under which it works best,
a concluding sentence that ties back to the macro framework.

5) South Africa Contextualisation (without guessing)

Use contextual triggers only if the question provides them:

exchange rate depreciation → imported inflation,
commodity shocks → supply-side cost effects,
unemployment structure → NAIRU may shift.

Quick “Core Formula” Reference (Use During Practice)

GDP (expenditure):
[
Y = C + I + G + NX
]
Net exports:
[
NX = X – M^{im}
]
Consumption function:
[
C = a + b(Y – T)
]
Keynesian cross equilibrium:
[
Y = C + I + G
]
Government spending multiplier:
[
k_G = \frac{1}{1-b}
]
Tax multiplier:
[
k_T = -\frac{b}{1-b}
]
Short-run Phillips curve (expectations-augmented):
[
\pi = \pi^e – \beta(u – u^*)
]
Quantity theory (idea):
[
MV = PY
]

Final Revision Plan (Last Week Workflow)

Day 1–2: AD-AS and policy (draw, label, and explain at least 8 shock scenarios).
Day 3: Keynesian cross + multipliers (do at least 10 numeric problems).
Day 4: IS–LM style equilibria (solve 6–8 intersections; then do two policy shifts each).
Day 5: Phillips curve and expectations (compute inflation changes with unemployment gaps; answer discuss questions).
Day 6–7: Open economy (exchange rate/NX/inflation tradeoffs; answer mixed shock scenarios).

This workflow mirrors the skills graders look for: correct framework identification, consistent sign reasoning, and clean algebra.

If you want, I can also generate a full mock exam (questions + memo-style solutions) specifically for EKN 234 Macroeconomics 234 in a UP BCom Economics exam style, and organise practice around the exact section topics above.