Full Employment

• Full employment equilibrium exists where AD intersects SRAS & LRAS at the same point

Recessionary GAP

• A recessionary gap exists when equilibrium occurs below full employment out put

Recessionary GAP <- AD decreases

• The Gap that exists whenever equilibrium real
• GDP year is less than full-employment real GDP as shown

inflationary GA

•  An inflationary GAP exists when equilibrium occurs beyond full employment output

Investment Demand
Interest Rate

what is investment

• money spent of expenditures on:
• - new plant (factories)
• - capital equipment (machinery)
• - technology (hardware software)
• - new homes
• - Inventories (goods sold by produces

Expected Rate of Return

• How does business determine the benefits?
• - how does business count the cost
• - Interest Cost
• How does business determine the amount of investment my undertake
• - compare expected rate of return to interest cost
• if expected return> interest cost
• if expected return< interest cost then do not interest.

Real (r%) v. Nominal (I%)

• what's the difference?
• -Nominal is the observable rate of interest. real subtract out inflation (pie%) and is only known ex post factor
• how do you complete the real interest rate (r%)
• r%= I%- pie%
• what then determine the cost of an investment decision?
• - the real interest rate (r%)