Personal consumption expenditures (C)

Durable goods
Nondurable goods
Services
Gross private domestic investment (l)

no min al .GDP
National income
real .GDP GDP
. price.deflat
Compensation of employees
min al . wage
real .wage noprice
.index
Proprietors income
S

C
Corporate profits
AE C I
Net interest
Nonresidential
C
a b Y
Rental income
Equilibrium:
Residential
Depreciation
Y AE
Change in business inventories
Government consumption and gross investment (G) Indirect taxes minus subsidies Y C I
Net factor payments to the
Federal
Multiplayer:
rest of the world
State and local
1
Net exports (EX IM)
MPS
Other
Change in inventory
GDP C I G EX IM Gross domestic product
Exports (EX)
= production - sales
Imports (IM)
Adding government and taxes
Disposable personal
Total gross domestic product (GDP)
Y CS
Y Y T

income

GDP
Plus: receipts of factor income from the rest of the world

Less: payments of factor income to the rest of the

world

Equals: GNP
Less: depreciation
Equals: net national product (NNP)
Less: indirect taxes minus subsidies plus other
Equals: national income
Less: corporate profits minus dividends
Less: social insurance payments

Less:
Personal consumption
expenditures
Interest paid by
consumers to business

Y C S T
AE C I G equilibrium
S T I G
Budget Deficit G T

If G>T, government must borrow

from the public to finance deficit,
Personal transfer payments to by selling treasury bonds and bills
foreigners
C a b Yd a b Y T
1
Equals: Personal savings Government spending multiplier: MPS

Tax multiplier: MPC

MPS
Labor force = employed + unemployed
Leakages / injection
Population = labor force + not in labor force :equilibrium
unemployed
S+I=T+G
Unemployment rate = labor . force
Equilibrium in an
labor. force
:open economy
Plus: personal interest income received from the government Labor force participation rate = population
Y=C+I+G+(IM-EX)
and consumers
Full employment = 4%-6% of unemployment
The fed can control the
Required Reserve Ratio is the link
Plus: transfer payments to persons
money supply with
between the reserves of commercial
Equals: personal income
3 tools:
banks and the deposits that
Less: personal taxes
commercial banks are allowed to
1.
Changing the
Equals: disposable personal income
create.
required reserve
M1- is money that can be directly used for transactions. M1 =
currency held outside banks + demand deposits + travelers
checks + other checkable deposits.

ration
2.

M2- Broad money. Includes near monies, or close substitutes for 3.

transactions money. M2 = M1 + savings accounts + money
market accounts + other near moneys. M2 is more stable then
M1.
.received . per . year
Deriving the aggregate
Interest rate int erest
100
amount .of .the.loan
demand curve
Investment,
interest
R I AE Y
rate and goods market
R I AE Y
Money demand, aggregate
output (income), money
Y Md r
market
Crowding-out effect
G Y Md r I
Y Md r

Expansionary
monetary policy
Contractionary
G T Y Md r I
fiscal policy
Ms r I Y Md Contractionary
monetary policy
Ms r I Y Md

Changing the
discount rate.

The fed can increase rrr to decrease

the money supply, or decrease the rrr
to increase the money supply

Engaging in open
market operations

Discount rate is the rate banks pay to

the fed to borrow from it.

Money
multiplier:

The higher the discount rate, the

higher the cost of borrowing, and the
less borrowing banks will do.

1
rrr

Open market operations is the

purchase and sale by the fed of
government securities in the open
market An open market purchase by
the fed will result increase in
reserves and in the supply of money,
by amount equal to the money
multiplier times the change in
reserves. Open market sale will
result decrease in reserves and in the
supply of money by amount equal to
the money multiplier times the
change in reserves.