UNIT 3: Aggregate Demand & Supply 2/23/16

Investment Demand is the demand for new factories, machinery , technology, new homes, inventory.

Expected Rate of Return determines how much people invest; The higher the expected rate of return the more people will be willing to invest in businesses.
Interest Rates > Expected Rate of Return =  No or less interest
Interest Rates < Expected Rate of Return =  More interest

Real(r% or interest cost) vs Nominal Interest(i%)
r% = i% - pi(inflation rate)

Interest Demand Curve is sloping downward;
As interest rate goes up, Loans supplied decreases
And as Interest rates goes down, Loans supplied increase.

Lower costs and Lower Business Taxes push the curve to the right
Positive changes in technology also pushes ID curve to the right
More Stock Capital in the economy increases the curve to the right
Expectations Positive moves it right and Negative moves it left.

2/24/16

Classical Vs Keynesian Economic Schools of Thought  

Classical includes thoughts such as:

• Competition is good
• "invisible hand" or self regulation of the economy
• the economy is at balance at Full Employment 
• "Trickle down" effect
• Strengthening the rich so they can strengthen the poor 
• Modern followers include: Adam Smith, J.B. Say, Alfred Marshall, David Ricardo
• Say's Law: Supply creates Demand 
• Under-spending is Unlikely
• Production = income = spending
• investment = savings
• Prices and Wages are flexible downward 
• Unemployment is negated by price/wage flexibility but can be cause by external sources
• Inflation is caused by too much money
• Basic Equation is MV = PQ

Keynesian includes thoughts such as:

• Competition is flawed
• Aggregate Demand creates Supply not vice versa
• Leaks in the circulation or savings cause recessions
• Ratchet effect causes sticky wages
• Recession's block Say's Law
• In the long run "We are all dead"
• Modern Followers include: J.M. Keynes
• Depressions refute Say's Law
• Under-spending persists.
• Saving does not equal Interest since people save/invest for different reasons
• Lending boost money supply
• Prices and wages are inflexible downward due to the Ratchet effect
• Basic Equation is  C + Ig + Xn + G
• Inflation is caused by too much demand
• Government should use fiscal policy to regulate economy 
• Economy is not self regulating, no "invisible hand"