EF5472 Advanced Macroeconomics

How EF5472 is assessed

The revised and original syllabus files agree on these three components and weights, which total 100%. The published materials identify both exams as closed book. The final is cumulative and weighted toward the second half, with multiple-choice and analytical or essay questions. Confirm exact dates and operational instructions on Canvas.

Current EF5472 dates

Dates are as published in the published Semester A, 2026/27 course schedule. Confirm exact deadlines and submission settings in the live LMS.

What EF5472 covers

Six chapters move from macroeconomic measurement and classical equilibrium through intertemporal choice and Ramsey dynamics to Solow convergence and innovation led growth.

The published objectives combine theory with judgement: analyse macroeconomic issues using standard models, evaluate the relevance and limitations of those models in applications and historical context, and assess government and central-bank policy. The practical implication is that algebra must be paired with interpretation.

A correct first-order condition earns little if the answer cannot say what is held fixed, which market clears or why a result changes when an assumption is relaxed.

Macroeconomic Measurement and Cycles

The guide begins with the objects every later model must explain.

GDP is read through production, income and expenditure, with careful treatment of final goods, value added, domestic location and current production. Nominal and real output are separated through price indices, and the exact Fisher relation keeps nominal rates, real rates and inflation in consistent units. Labour-market stocks are linked to job-finding and separation flows.

The chapter closes with business-cycle evidence on volatility, comovement, persistence and Okun relations, while stressing that an accounting identity or statistical regularity is not a causal model.

Classical General Equilibrium

The static classical model fixes technology and factor endowments, which determines full-employment output before demand is allocated.

Competitive firms pay capital and labour their marginal products. Under Cobb-Douglas technology and constant returns, factor payments exhaust output and the exponents become income shares. Households consume and save, firms reduce desired investment as the real interest rate rises, and goods-market clearing equates national saving with investment.

Fiscal policy changes saving, the interest rate and investment within this closure rather than the fixed level of output.

Intertemporal Choice and Euler Logic

Dynamic optimisation replaces an imposed saving rule with a household choice. Patience discounts later utility, curvature governs willingness to shift consumption across dates and technology supplies the return on saved resources.

The Euler equation balances the marginal utility lost today against the discounted marginal utility gained tomorrow. It provides a ratio, while resource constraints determine levels.

Borrowing limits or non-negativity constraints can invalidate the interior equality, so every proposed solution is tested against its feasible set.

Ramsey Equilibrium and Transition Paths

Infinite horizons add a boundary condition to feasibility and Euler optimality. The transversality condition rules out paths that sacrifice consumption to accumulate valuable resources forever.

In the decentralised economy, factor pricing, household optimisation and market clearing reproduce the planner allocation under the undistorted assumptions. The phase diagram distinguishes inherited capital, which cannot jump, from consumption, which can.

Only the stable saddle path reaches the modified-golden-rule steady state, making impact, transition and destination separate parts of every policy answer.

Solow Growth and Convergence

The Solow model fixes saving and studies how capital per worker evolves. Actual saving is compared with break-even investment needed to offset depreciation and population growth.

Diminishing returns generate a unique positive steady state and convergence toward it. Higher saving raises the long-run level and creates transitional growth, but cannot sustain per-worker growth without technological progress. Golden-rule saving maximises steady consumption.

Growth accounting and convergence regressions then organise the data while leaving room for measurement error and different steady-state determinants.

Innovation and Endogenous Growth

Endogenous growth asks how accumulation can avoid the diminishing return that ends Solow capital deepening. The AK benchmark imposes constant returns to broad capital.

Innovation models instead make ideas non-rival, award temporary monopoly profit to blueprint owners and let research labour create new varieties. Free entry links research cost to blueprint value, while the household Euler equation prices the consumption-growth path. Their intersection determines growth and returns.

Scale effects, knowledge spillovers and monopoly distortions explain why a policy that raises research or growth need not automatically raise welfare.

How the assessment changes study strategy

The midterm is closed book and covers the real-economy material taught in the first part of the semester.

The final is also closed book, cumulative and weighted toward later topics, with multiple-choice and analytical or essay questions. The exact final date is not stated in the syllabus, although the examination window is published. The available teaching capture is rich through growth and thinner for later money, crisis, nominal, open-economy and incomplete-market blocks.

Use this guide to master the complete captured methods, then combine it with the current Canvas materials for the rest of the cumulative final.

Worked example · free

Solve and interpret a Solow steady state

Key terms

Accounting Identity

A relation true by definition that constrains consistent measurements but does not by itself establish causation.

GDP Deflator

The price index obtained by dividing nominal domestic output by real domestic output and multiplying by one hundred.

Marginal Product

The extra output produced by one additional unit of an input while other inputs are held fixed.

Factor Share

The fraction of income paid to a factor of production, equal to its output elasticity in the competitive Cobb-Douglas case.

Euler Equation

The optimality condition equating current marginal utility with discounted future marginal utility multiplied by the gross return.

Transversality Condition

The boundary condition ruling out an optimal path that leaves valuable resources unused through excessive accumulation.

Saddle Path

The stable trajectory that converges to the Ramsey steady state from a given inherited capital stock.

Steady State

A rest point at which the model variables expressed in stationary units remain unchanged.

Golden Rule

The capital stock that maximises sustainable steady-state consumption in the Solow model.

Solow Residual

Output growth left after subtracting factor-share-weighted capital and labour growth in a growth-accounting decomposition.

Conditional Convergence

The tendency to approach an economy-specific steady state after accounting for its saving, population, technology and other determinants.

Scale Effect

A model prediction that a larger research workforce or economy permanently raises the rate of idea growth.

EF5472 FAQ

Questions students ask in each EF5472 chapter

Why does the expenditure identity not prove a fiscal multiplier?

The identity classifies realised spending and must hold after transactions are recorded. It does not specify how households, firms, prices or monetary policy respond when government purchases change. A multiplier is a causal prediction that needs behavioural equations and an equilibrium closure beyond the accounting relation. Chapter 01 · Macroeconomic Measurement and Cycles

Why does demand not determine output in the classical model?

Capital, labour and technology are fixed before spending decisions are allocated, so the production function already pins down output. Prices distribute income and the real interest rate divides output among uses. Demand affects output only after a later model adds a friction or unused-capacity mechanism. Chapter 02 · Classical General Equilibrium

Why does the Euler equation not determine consumption levels by itself?

It equates a local trade-off and usually yields a ratio between consumption dates. Total resources, production feasibility or a lifetime budget is needed to determine the scale. In longer horizons, initial wealth and a terminal or transversality condition also help select the complete path. Chapter 03 · Intertemporal Choice and Euler Logic

Why is a transversality condition needed after the Euler equation?

Euler conditions compare neighbouring dates and therefore enforce local optimality. They do not eliminate paths that save too much forever and leave valuable assets unused. Transversality supplies the boundary discipline, selecting a globally admissible path when combined with feasibility and the maintained concavity assumptions. Chapter 04 · Ramsey Equilibrium and Transition Paths

Why does higher saving not permanently raise Solow growth?

Capital deepening raises output, but diminishing marginal products make each additional unit contribute less. The economy eventually reaches a higher steady state where saving again only covers depreciation and population dilution. During the transition growth is faster, while the long-run per-worker growth rate returns to the exogenous technology rate. Chapter 05 · Solow Growth and Convergence

How does AK differ from Solow?

AK gives broad capital a constant marginal product, so accumulation can sustain growth instead of flattening toward a stationary capital level. Solow imposes diminishing returns to capital and needs exogenous technological progress for lasting per-worker growth. AK is transparent but compresses the microeconomic origin of knowledge and incentives. Chapter 06 · Innovation and Endogenous Growth

How to study for the exam

Begin each study session by reconstructing one model on blank paper: environment, feasibility or accounting, behaviour, market clearing, steady state and comparative static. Then recompute one original numerical example and explain the result aloud without symbols. Keep a separate error log for unit mistakes, gross-versus-net returns, state-versus-control confusion and level-versus-growth claims.

Before the midterm, add the current search-unemployment and real-business-cycle handouts to the measurement, classical, dynamic-choice and growth chapters here. Before the final, use the live Canvas notes for money, banking, crises, nominal rigidities, open-economy analysis and incomplete markets because the published final is cumulative and weighted toward that later material.

Closed-book preparation should end with retrieval, not rereading: reproduce the six core diagrams, derive each equilibrium condition and finish every answer with its model-specific limitation.

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