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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.
Private Saving = Yd - C
Public Saving = T - G
3 Different Components of Money
Currency: coins and bills
Checkable Deposits: money held in banks
Bonds: Financial instrument that pays interest
What does the Fed do to increase money supply?
Buy bonds on the open market.
If a bond costs 80$ and promises to pay 100$ one year from now on, what is the implied interest rate?
Formula for calculating interest rate
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.
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.
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