The second term that will lead to a shift in the aggregate demand curve is I

The second term that will lead to a shift in the aggregate demand curve is I

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The second term that will lead to a shift in the aggregate demand curve is I(r). This term  states that investment is a function of the interest rate. If the interest rate increases,  investment falls as the cost of investment rises. There are a number of ways that  investment can fall. If the interest rate rises, say due to contractionary monetary or fiscal  policy, investment will fall. Similarly, in the short run, expansionary fiscal policy will also  cause investment to fall as crowding out occurs. Another interesting cause of a fall in  investment is an exogenous decrease in investment spending. This occurs when firms  simply decide to invest less without regard for the interest rate.  The term variable that will lead to a shift in the aggregate demand curve is G. This term  captures the whole of government spending. The only way that government spending is 
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This note was uploaded on 12/13/2011 for the course ECO 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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