SRAS Graphs/ Interest Rates & Investment Demand

Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.

Recessionary Gap exists when equilibrium occurs below full employment output.


Inflationary gap exists when equilibrium occurs beyond full employment output.


Notes on SRAS

• -Nominal Wages: (what you make) the amount of money received by a worker per unit of time
• -Real Wages: (how far you can go with $$) the amount of goods and services that a worker can purchase with their nominal wages
• -Sticky Wages: the nominal wage level that is set according to an initial price level and does not vary due to labor, contracts, or other restrictions.
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Interest Rates & Investment Demand
-What is Investment?
-money spent or expenditures on : new plants, capital equipment (machinery), technology, new homes, inventories (goods sold by producers)

Expected Rates of Return

• How does business make investment decisions?

cost/benefit analysis

• How does business determine benefits?

 expected rate of return

• How does business count the cost?

interest costs

• 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 do not invest