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EXAM1 GUIDE

# EXAM1 GUIDE - ECON325 Chapter3 CompositionofGDP...

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ECON325 13/05/2009 11:35:00 Chapter 3 Composition of GDP Consumption (C) Investment (I) Fixed investment Residential investment Nonresidential investment Government Spending (G) Net Exports (Exports – Imports) Demand for Goods Z = C + I + G + EX – IM Closed economy = EX = IM = O We assume, Z = C + I  + G Consumption C = C(Yd) (positive correlation) C = Co + C1(Yd)  - linear consumption relationship  Co = Autonomous  consumption, C1 = propensity to consume Disposable income = Yd = Y – T C = Co + C1(Y – T) Investment

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I = I (bar) , investment is exogenous and is given to us.    Government Spending Fiscal Policy , T and G together Take both G and T as exogenous Equilibrium Output Z = C + I + G Z = Co + C1(Y – T) + I(bar) + G Equilibrium in goods market,  Z = Y Multiplier =  1 / [1-C1] Chapter 4 Demand for Money Assume you only have choice between two assets… o Money Use for transactions, pays no interest Currency and Checkable Deposits (Checking Accounts) o Bonds  Pay positive interest rate   Cannot be used for transactions o Level of transactions You want enough money on hand to cover all transactions while  having max. amount in bonds
Money Market Funds o Pool together funds of many and used to purchase bonds Demand for Money – Md = \$YL(i) (negative relationship between interest rate  and demand for money, amount people want to hold)

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EXAM1 GUIDE - ECON325 Chapter3 CompositionofGDP...

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