Unit 3 (2/17/15)

Full employment
  Full employment equilibrium exist where AD intersects SRAS and LRAS at the same point .
Recessionary gap
  Exist when equilibrium occurs below full employment output.
Inflationary gap 
  Exist when equilibrium occurs beyond full employment output.

   Invest rates and investment demand
Investment: money spent or expenditures on:
-New plants (factories)
-Capital equipment (machinery)
-Technology (hardware and software)
-New homes
-Inventories (goods sold by producers)

   Expected rates of return
How do businesses make investment returns
-Cost/Benefit analysis
-How does business determines the benefits
-Expected rate of returns
How does business count the cost?
-Interest cost
How does business determine the amount of investment thy undertake?
-Compare expected rate of return to interest cost
*If expected return > interest: Invest (Vice Versa)

Real (R%) Vs. Nominal (I%)
Whats the difference?
-Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known ex post facto.
How do you compete the real interest rate (R%)
-R% = I% - π%
What the determines the cost of an investment decision?
-The real interest rate (R%)