NOTES ON SRAS
Nominal Wages: the amount of $ received by a WORKER per unit of TIME. (Paid hourly)
- what you make.
Real Wages: the amount of goods & services a worker can purchase with their nominal wages.
- the purchasing power of nominal wages.
- how far you can go with your money.
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.
Keynesian = Recession: Price Fixed, Wages Fixed, Employment Level Flexible
Intermediate: Price Flexible, Wages Fixed, Employment Level Flexible
Classical = Inflation: Price Flexible, Wages Flexible, Employment Level Fixed
What is Investment?
-Money spent or expenditures on:
New plants (factories)
Capital equipment (machinery)
Technology (hardware & software)
New homes
Inventories (goods sold by producers)
Expected Rates of Return:
How do businesses make investment decisions?
- Cost/Benefit Analysis
How does business determine the 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, DO NOT invest
Real (r%) v. Nominal (i%)
What's the difference?
- Nominal is the observable rate of interest. Real subtracts out inflation (π%) and is only known
ex post facto.
Real Interest Rate:
r% = i% - π%
What determines cost of an investment decision?
- the real interest rate (r%)
Investment Demand Curve (ID)
- Downward sloping
- Why? - When investment rates are high, fewer investments are profitable; when interest rates are low, more investments are profitable.
Shifts in Investment Demand (ID)
Cost of Production:
- Lower costs shift ID --->
- Higher costs shift ID <---
Business Taxes:
- Lower business taxes shift ID --->
- Higher business taxes shift ID <---
Technological Change:
- New technology shift ID --->
- Lack of technological change shifts ID <---
Stock of Capital:
- If an economy is low on capital, then ID --->
Expectations:
- Positive expectations shift ID --->
- Negative expectations shift ID <---
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