UNIT 3: CLASSICAL, KEYNESIAN, & INTERMEDIATE NOTES

Graph on Classical, Keynesian & Intermediate range

Nominal Wages:

• It is the amount of money received by a worker per unit of time.
• Ex: by an hour, by day, etc. 

Real Wages:

• It is the amount of goods and services a worker can purchase with their nominal wages.
• Purchasing power of nominal wages --> what you can and cannot buy 

Sticky Wages:

• The nominal wage level is set according to an initial price level and does not vary due to labor contracts or other restrictions. 

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 does business 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 under take?

• Compare expected rate of return of investment cost 
• If expected return > interest cost, then invest
• If expected return < interest cost, then not invest 

Real (r%) v. Nominal (i%):

- What is the difference?

• Nominal is the observable rate of interest. 
• Real subtracts out inflation (π%) & known ex post facto

- How do you compare the real interest rate (r%)?

• r% = i% - π%

- What then, determines the cost of an investment decision?

• The real interest rate (r%)

Classical: 

• Competition is good.
• The invisible hand (means market will fix itself no government needed.)
• In the long run, the economy will balance at full employment. 
• Trickle down effect (help the rich first and everybody else second.)
• The economy is always close to or at full employment. 

Keynesian: 

• Competition is fraud.
• AD is the key not AS.
• Lits & Savings cause recessions.
• Ratchets effects & sticky wages blocked Say's Law.
• In the Long Run, we are all dead