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Unformatted text preview: spend after taxes. The function for consumption is aggregated across all consumers and thus is applicable for all incomes and tax brackets. Consumption captures spending by households on goods and services. Examples include purchasing food, movie tickets, and vacations. The third piece of the aggregate demand equation is I(r). This signifies that investment spending is a function of the real interest rate. That is, as the real interest rate increases, investment spending falls because the cost of borrowing money increases. The real interest rate is simply the nominal interest rate as published in the media corrected for expected inflation. When firms consider investment spending, they routinely take into account the nominal interest rate, inflation, and the real interest rate. Examples of investment spending include machinery, buildings, education, and new housing....
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.
- Fall '08