AS/AD model
Full employment:
equilibrium exist where AD intersects SRAS and LRAS at the same point.
Recessionary Gap: occurs
when equilibrium occurs below full employment output
Any time recession or recessionary
gap AD is decreasing and shifts to the left
Inflationary Gap: exist when equilibrium occurs beyond full
employment output
AD shifts to the right
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Interest Rates and Investment demands
Investment: money spent or expenditures on: New plants
(factories), Capital equipment (machinery), Technology (Hardware and software),
New Homes, Inventories (goods sold by producers)
How business make decisions: Cost/ benefit analysis
How business determine the benefits: expected rate of return
How does business count the cost: Interest cost
How does business determine the amount of investment they
undertake: Compare expected rate of return to interest cost. If expected return
> interest cost then invest, If expected return < interest cost then
don’t invest.
Real (r%) v. Nominal (i%)
Nominal is observable rate if interest. Real subtracts out
inflation also known as ex post facto.
R%= i% - Pi%
Real interest rate determines investment decisions
Investment demand curve: it is downward sloping because when
interest rate high, few investments are profitable, when they are low then more
are profitable
Your notes are very organized and the graphs help to give a visual of where the the graph shifts as well as having the explanation that you provide. The explanations are short but simple and get to the point. the recessionary gap graph helped me the most to understand that the graph moves left of the LRAS when it is below full employment,
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