# Macro Theory

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 Author: Anonymous ID: 136371 Filename: Macro Theory Updated: 2012-02-19 19:57:26 Tags: ECO Folders: Description: Midterm Review Show Answers:

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1. 3 Methods of Computing GDP
• 1. Expenditure Apporach: C + I + G + XN
• 2. Income Approach: W + I + R + P
• or: Labor Income + Capital Income + Indirect Taxes

• 3. Production Approach: Sum of value of all final goods
• or: sum of all value added.
2. Define Savings
Private Saving = Yd - C

Public Saving = T - G
3. 3 Different Components of Money
Currency: coins and bills

Checkable Deposits: money held in banks

Bonds: Financial instrument that pays interest
4. What does the Fed do to increase money supply?
Buy bonds on the open market.
5. If a bond costs 80\$ and promises to pay 100\$ one year from now on, what is the implied interest rate?
25%
6. Formula for calculating interest rate
7. Explain what "crowding out of private investment" means
When the government tries to stimulate the economy through increasing spending, at the given money supply, the interest rate will increase, which will decrease the demand for investment, lowering output.

8. During recessions, many unemployed looking for jobs become discouraged. Are these people counted in the labour force? Does this cause the participation rate to increase/decrease?
These people are not counted in the labor force, and cause the paricipation rate to decrease.
9. Consider a model of the goods market that is described as follows:
C = c0 + c1Yd
I = I + qYd
G = G
T = t0 + t1Y

What is aggregate demand?
Y = c0 + c1(Y - (t0 + t1Y)) + I + qYd + G

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