Unit 3- Wages

Nominal Wages vs. Real Wages

• Nominal Wages: Amount of money received by a worker per unit of time.
• Real Wages: Amount of goods/services a worker can purchase with their nominal wage. 
• Sticky Wages: Nominal wage level that is set according to an initial price level and does not vary due to labor contracts or other restrictions.

• Recession(Keynesian Range): Fixed price and wages and flexible employment level.
• Output depends upon changes in employment level.
• Intermediate Range; Flexible price and employment level and fixed wages.
• Output depends upon changes in price and employment level.
• Inflationary Range: Flexible price and wages and fixed employment level.
• Output is independent of changes in the price level.
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Investment

• Money spent or expenditures on new plants (factories), capital equipment (machinery), technology (hardware and software), new homes, and inventories (goods sold by producers).
• 

Expected Rates of Return

• How does business make investment decisions?
• Cost/Benefit Analysis
• How does business determine benefits?
• Expected rate of return
• How does business count the cost?
• Interest costs
• How does business determine the amount of investment they undertake?
• If expected return > interest cost, then invest.
• If expected return < interest cost, do not invest.

Real (r%) vs. Nominal (i%)

• Nominal is the observable rate of interest.
• Real subtracts out inflation (pi%) and is only know ex post facto.
• How do you compare the real interest rate (r%)/
• r% = i% - pi%
• What then, determines the cost of investment decision? 
• Real interest rate (r%)

Investment Demand Curve (ID)

• 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.
• Cost of production
• Lower costs shift ID > 
• Higher costs shift ID < 
• Business taxes
• Lower business taxes shift ID >
• Higher business taxes shift ID < 
• Technological Change
• New technology shifts ID >
• Lack of technological change shifts ID < 
• Stock of capital
• If an economy is low, then ID >
• If capital increases, then ID < 
• Expectations
• Positive = ID >
• Negative = ID <