ECON 305 Study Guide - Midterm Guide: Investment Goods, Ricardian Equivalence, Permanent Income Hypothesis

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Limit your answers to the space provided below each question. Exam begins at 10:30am and ends at 12:00pm. [1] [15 marks] the income-expenditure identity is usually expressed mathematically as + (a) de ne each of the ve terms in the expression above, and explain why both sides of the identity correspond to the gdp. Y - gross domestic income (income generated by domestic factors of production) C - private sector spending on nal consumer goods and services. I - private sector spending on nal investment goods and services. G - public sector spending on nal goods and services. Nx - foreign sector spending on nal goods and services less domestic spending on imported. All that is produced (gdp) must be purchased by someone and is therefore equivalent to expenditure. Using means that income is equivalent to expenditure; and not just equal to expenditure. Equivalence means that income is by (accounting) de nition equal to expenditure.

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