The Full Employment
*Full employment equilibrium exists where AD intersects SRAS and LRAS at the same point.
Recessionary Gap
* A recessionary gap exists when equilibrium occurs below unemployment output.
-AD is decreasing at a recessionary gap
Inflationary Gap
* An inflationary gap exists when equilibrium occurs beyond full employment output.
- Inflationary gap, AD shifts right.
Interest Rate & Investment Demand
*What is Investment?
^Money spent or Expenditures on:
-Newplants (factories)
-Capital Equipment (machinery)
-Technology ( hardware/ software)
-New home
-Inventories (goods sold by producers)
Expected Rates of Returns
*How does business make investment decisions?
^Cost & benefit analysis
*How does businesses determinate the benefits?
^Expected rate of return.
*How does businesses count the cost?
^Interest costs
*How does businesses determinate the amount of investment they undertake?
^Compare expected rate of return to interest costs.
-If expected return> interest cost, than investment.
Real (r%) Vs.  Nominal (i%)
*Whats the difference?
-Nominal is the observable rate of interest. Real subtracts out inflation ( pie%) and is only known ex post facto.
*How do you compute the real interest rate (r%)?
- R% = i% - pie%

Investment demand curve (ID)
*What is the shape of the investment demand curve?
- Downward slopping
*Why?
- When interest rates are high fewer investments are profitable, when interest rates are low, more investments are profitable.
Shifts in investment demand
- Cost of production
   low cp, shifts right
   high cp, shifts left
- Business Taxes
   lower bt, ID shifts right
   higher bt, ID shifts left
-Technological change
  new tech, shifts right
  lack of tech, shifts left
-Stock of capital
  Eco low, ID shift right
  Eco high, ID shift left
-Expectations
 investment(positive), shifts right
 Investment(negative), shifts left