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Chapter 3 – The goods market

Chapter 3 – The goods market. Components of GDP Aggregate Expenditure – Aggregate Output Model (aka Keynesian Cross). 3-1 The Composition of GDP. Table 3-1 The Composition of U.S. GDP, 2010. Natural questions we have to ask: Why do we have business cycles?

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Chapter 3 – The goods market

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  1. Chapter 3 – The goods market • Components of GDP • Aggregate Expenditure – Aggregate Output Model (aka Keynesian Cross)

  2. 3-1 The Composition of GDP Table 3-1 The Composition of U.S. GDP, 2010

  3. Natural questions we have to ask: • Why do we have business cycles? • What can the government do against BC’s? • Which measure of fiscal policy is more effective in combatting BC’s? • We have to introduce a model to • answer these questions

  4. Crowding out: Investment/GDP vs. GS/GDP

  5. Components of GDP (excluding NX)

  6. Numerical example Suppose the United States economy is represented by the following equations: Z = C + I + G C = 500 + .5YD, T = 600, I = 300 YD = Y - T G = 2000 a. Given the above variables, calculate the equilibrium level of output. b. Now, assume that taxes increase from 600 to 700. What is the new equilibrium level of output? How much does income change as a result of this event? What is the multiplier for this economy?

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