Unit 3: Notes and Need-To-Knows 2.17.15

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

Inflationary gap: when equilibrium occurs beyond full employment output.

Investment Rates and Demand is when you use money and resources on:

New manufacturing facilities and factories
Capital equipment
Technological Advances
New Homes
Change in Inventories

Expected rates of return:
Businesses make investment returns with a cost and benefit analysis
Business measures the benefits by calculating their expected rate of returns and count the

cost by looking at interest costs
They also determine the amount of investment thy undertake by looking at both the expected rate of return and the interest cost.

If returns are expected to be higher than interest, then you should invest.

Nominal Interest Rate is the interest rate that is currently occurring

Real Interest Rate takes out the inflation rate when calculating interest. This is what usually determines investment decisions.