Friday, March 4, 2016

Nominal Vs. Real Wages

Nominal Wages vs Real Wages

  • Nominal Wages- Amount of money received by a worker per Unit of Time
  • Real Wages- Amount of Goods and Services a Worker can purchase with their Nominal Wages
Sticky Wages- Nominal Wage Level that is set according to an initial price level, and it does not vary due to labor contracts or other restrictions 

Investment-
  • Money Spent on Expenditures on
    • New Plants (Factories)
    • Capital Equipment (Machinery)
    • Technology (Hardware& Software)
Cost/Benefit Analysis helps businesses make investment decisions

Expected Rate of Return helps businesses determine the benefits

Interest Costs help businesses count the cost


How do businesses determine the Amount of Investment they undertake?
  • Compare Expected Rate of Return to Interest Cost
    • Expected Return> Interest Cost, then invest
    • Expected Return< Interest Cost, then don't invest
Real (r%) vs Nominal (i%)
  • What's the Difference?
    • Nominal is observable rate of interest. Real subtracts out inflation and is only known as Ex Post Facto.
  • How do you Compute the Real Interest Rate?
    • r%= i%- π%
  • What determines the Cost of an Investment Decision?
    • Real Interest (r%)
  • What is the shape of the Investment Demand Curve
    • Downward Sloping
  • Why?
    • When interest rates are high, fewer investments are profitable. When interest rates are low, more investments are profitable.
Shifts in Investment Demand (ID)
  • Cost in Production
    • Lower Cost, ID Shifts Right
    • Higher Cost, ID Shifts Left
  • Business Taxes
    • Lower Business Taxes, ID Shifts Right
    • Higher Business Taxes, ID Shifts Left
  • Technological Change
    • New Technology, ID Shifts Right
    • Lack of Technology, ID Shifts Left
  • Stock of Capital
    • Economy Low on Capital, ID Shifts Right
    • Economy High on Capital, ID Shifts Left
  • Expectations
    • Positive, ID Shifts Right
    • Negative, ID Shifts Left

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