ECON5002 · Macroeconomic Theory
The Complete Exam Bible · S2 2026Macroeconomic Theory
ECON5002 Macroeconomic Theory is a postgraduate coursework unit in the University of Sydney School of Economics that develops a complete model-by-model account of how a modern economy determines output, employment, inflation, interest rates and the exchange rate. It is deliberately a lecturer's course, not a textbook course: the lectures build the macro framework around interest-setting monetary policy and endogenous money (a horizontal LM, zero crowding-out below full employment, the RBA setting the cash rate), so where the lectures diverge from the Gordon text, the exam rewards the lecture version. Assessment is built on a mid-semester test (Topics 1-3), four online quizzes, and a final exam (Topics 4-8), all closed-book. The exam rewards two things in particular: getting the quantitative cores right under time pressure (the multiplier, credit creation, IS-LM algebra, the sacrifice ratio, Solow-Swan steady states, the accelerator and interest parity) and essay answers with correct, labelled diagrams drawn from memory that name the assumption driving each result. Because the models build on each other, the students who do best treat the whole unit as one toolkit rather than nine separate topics.
What ECON5002 covers
ECON5002 builds one connected macro toolkit across nine chapters — from the circular flow and the Keynesian multiplier, through the financial system, IS-LM and AS-AD, to the Phillips curve, Solow-Swan growth, consumption-investment theory and the open economy.
How ECON5002 is assessed
| Component | Weight | Format |
|---|---|---|
| In-Semester (Mid-Semester) Test | 30% | 60 min supervised closed-book: Section I 15 MCQ (15%) + Section II one two-part essay marked /20 (15%); covers Topics 1-3 |
| Online Quizzes (x4) | 20% | Four Canvas quizzes at 5% each; 15 MCQ in 60 min, one attempt, open one week (Q1 T1-2, Q2 T3-4, Q3 T5-6, Q4 T7-8) |
| Final Exam | 50% | 2 hr + 10 min reading, supervised closed-book: Section A 20 MCQ (20%) + Section B two essays from four /20 each (30%); covers Topics 4-8 |
Solow-Swan steady state and the golden rule
- +2Steady-state condition: saving per worker equals break-even investment, s·f(k*) = (d + n)·k*. Substitute: 0.3·k*^0.5 = (0.04 + 0.06)·k* = 0.10·k*.
- +2Divide both sides by k*^0.5: 0.3 = 0.10·k*^0.5, so k*^0.5 = 3 and k* = 9.
- +2Output per worker y* = √9 = 3; consumption per worker c* = (1 − s)·y* = 0.7 × 3 = 2.1.
- +2Golden rule sets MPK = d + n. With y = k^0.5, MPK = 0.5·k^(−0.5) = 0.10, so k^0.5 = 0.5/0.10 = 5 and k_gold = 25.
- +1Since k* = 9 < k_gold = 25, the economy holds less capital than the golden rule, so it under-saves; a higher saving rate would raise steady-state consumption per worker.
Key terms
- Injections = leakages (J = L)
- The four-sector equilibrium condition I + G + X = S + T + M; saving, net taxes and imports leak from the spending stream while investment, government spending and exports inject back in.
- Expenditure multiplier
- The factor 1/(1 − c + ct + m) by which an autonomous spending change raises equilibrium income; each extra leakage (proportional tax t, marginal propensity to import m) shrinks it.
- Balanced-budget multiplier
- Equal to 1 in the simple lump-sum model: a matched rise in G and T raises income by exactly ΔG, because spending adds the full amount while the tax cuts demand only by the MPC fraction.
- Endogenous money
- Smith's signature framing: the RBA sets the short-term interest rate and the quantity of money adjusts to demand, so the money stock is demand-determined rather than a fixed policy lever.
- Horizontal LM
- Under interest-setting policy and endogenous money the LM schedule is horizontal at the policy-set rate; a change in policy is a vertical shift, not a movement along an upward-sloping LM.
- Crowding out
- The displacement of private spending by fiscal expansion. In this course it is zero below full employment, because the RBA holds the cash rate and credit is supplied at that rate; it appears only once income is pushed beyond natural output.
- Natural rate of unemployment (NAIRU)
- The frictional-plus-structural unemployment rate at which inflation is stable; the long-run Phillips curve is vertical at this rate, so there is no permanent inflation-unemployment trade-off.
- Expectations-augmented Phillips curve
- Friedman's relation linking the change in inflation to the gap between unemployment and the natural rate; with adaptive expectations a short-run trade-off exists but vanishes in the long run.
- Sacrifice ratio
- The cumulative excess-unemployment point-years (or lost output) needed per one-percentage-point reduction in inflation; larger under adaptive expectations, near zero under credible rational expectations.
- Golden rule (Solow-Swan)
- The saving rate that maximises steady-state consumption per worker, where the marginal product of capital equals d + n (depreciation plus population growth).
- Permanent-income hypothesis
- Friedman's theory that consumption tracks expected long-run (permanent) income, so the marginal propensity to consume out of transitory income is near zero — implying temporary tax changes have weak effects.
- Uncovered interest parity / Mundell-Fleming
- Arbitrage equalises expected returns across currencies, so a higher domestic rate implies expected depreciation; in the open-economy IS-LM this makes monetary policy strong under flexible rates and impotent under fixed rates (the policy trilemma).
ECON5002 FAQ
How is ECON5002 assessed?
Three components: a 30% mid-semester test covering Topics 1-3 (15 MCQ plus one two-part essay), four 5% online Canvas quizzes (20% total), and a 50% final exam covering Topics 4-8 (20 MCQ plus two essays chosen from four). All are closed-book.
Is there a final exam?
Yes. The final is worth 50%, runs for 2 hours plus 10 minutes reading time, is supervised and closed-book, and covers Topics 4-8 only (AS-AD, the Phillips curve, Solow-Swan growth, consumption and investment, and the open economy). Topics 1-3 are tested only in the mid-semester test.
What is the hardest part of the course?
Two things trip students up: this is a lecturer's course, so the exam expects Smith's interest-setting / endogenous-money version (horizontal LM, zero crowding-out) rather than the textbook, and every essay expects correct, labelled diagrams drawn from memory under time pressure. The level-versus-growth distinction in Solow-Swan and the policy-effectiveness flip across exchange-rate regimes are classic discriminators.
How should I prepare?
Make every model exam-drawable from memory and rehearse the quantitative cores (multiplier, credit creation, IS-LM algebra, sacrifice ratio, Solow-Swan steady state, accelerator, interest parity) under timed conditions. For essays, practise naming the assumption behind each result, since that is where the marks sit in this course.
Do I need the textbook?
Gordon's Macroeconomics is the prescribed text and useful background, but the unit is explicitly a lecturer's course — the lecture notation and emphasis diverge from Gordon, and where they clash the exam rewards the lecture version. Treat the lectures and tutorials as the primary source.
Is this guide official or affiliated with the University of Sydney?
No. This is an independent AskSia study resource created to help students revise. It is not produced, endorsed by, or affiliated with the University of Sydney. Always check Canvas and the official unit outline for current dates, weights and rules.
Can I use a calculator or notes in the exams?
Both exams are closed-book and supervised. The only materials permitted are a pen, pencil and a bilingual or foreign-language dictionary, so all formulae and diagrams must be memorised.
How to study for the exam
Treat ECON5002 as one connected toolkit, not nine isolated topics, and split your revision along the exam's own fault line: Topics 1-3 are tested only in the closed-book mid-semester, Topics 4-8 only in the final. For the quantitative cores — the multiplier, credit creation, IS-LM algebra, the sacrifice ratio, Solow-Swan steady states, the accelerator and interest parity — drill fresh numerical problems against the clock until the setup is automatic. For the qualitative cores, build a one-page essay plan per model that leads with a correct, labelled diagram and explicitly names the assumption driving the result, because this is a lecturer's course and the marks reward Smith's interest-setting, endogenous-money framing over the textbook. Finally, rehearse the high-value discriminators the exam keeps returning to: the balanced-budget multiplier equals one, the LM is horizontal so fiscal policy has no systematic effect on the interest rate, a higher saving rate changes the level but not the long-run growth rate, and policy effectiveness flips with the exchange-rate regime.
