Real nominal (r) vs Nominal (i) Intrest rate

REAL(r) vs. NOMINAL(i) INTEREST RATE

Real Interest Rate : r% = i% - pi%

Determines the cost of an investment decision = The Real Interest Rate

INVESTMENT DEMAND CURVE (ID)

Ø  Downward Sloping

Ø  When interest rates are high, fewer investments are profitable

SHIFTS IN INVESTMENT DEMAND (ID)

Costs of Production                                                         Business Taxes

*Lower costs, IDà                                                              *Lower Business Taxes, ID à

*Higher costs, IDß                                                             Higher Business Taxes, ID ß

Technological Change                                                    Stock of Capital

New Technology, IDà                                                       Economy low on Capital, ID à

Lack of technology, IDß                                                   Economy has alot ofCapital, ID ß

Expectations

Positive, ID à

Negative, ID ß

CLASSICAL

Ø  Classical believes competition is good.

Ø  Believes in invisible hand(Automatic Regulation)

Ø  In the long run, the economy will balance at full employment

Ø  Trickle- Down Effect(Help Rich First, Everybody Else Second)

KEYNESIAN

Ø  AD is Key, Not AS.

Ø  Leaks and Savings cause Recessions.

Ø  In the Long run, we are all dead.