[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
AGGREGATE EXPENDITURES AND OUTPUT
Aggregate expenditures and output are equal where the aggregate expenditures
schedule crosses the 45-degree line.
Shifts in the aggregate expenditure schedule have a multiplied impact on the level
of equilibrium output. This multiplier depends on the marginal propensity to
consume, the marginal tax rate, and the marginal propensity to import.
Factors that can shift the aggregate expenditures schedule up and increase equilibrium
output include
increases in wealth or expectations of higher future disposable income
a reduction in the perceived risks of investment
a fall in the value of the dollar
a fall in the real rate of interest.
Aggregate Expenditures and the
Real Interest Rate
Our discussion has highlighted a number of factors in addition to national income
that can alter aggregate expenditures at each level of national income: expectations
about future income, wealth, the exchange rate, and one of the most important, the
real rate of interest. The impact of the interest rate on aggregate expenditures provides
monetary policy a key means of affecting economic activity. Changes in the
real interest rate influence investment spending and household purchases of new
homes and durables like autos. Chapters 17 and 18 will discuss how interest rates
also affect the exchange rate and therefore net exports. This connection offers
another channel through which monetary policy can attempt to control aggregate
expenditures.
Each of the aggregate expenditures schedules used in this chapter was drawn
for a given real rate of interest. A change in the real rate of interest shifts the
AE schedule. A decrease in the real rate, for instance, raises investment spending
as credit becomes more readily available and firms find it less costly to borrow
to undertake new projects. Such a decrease would therefore shift the AE schedule
up, increasing the equilibrium level of GDP. An increase in the real interest
rate has the opposite effect, shifting the AE schedule down and reducing
equilibrium GDP.
For an open economy, interest rate changes can also affect net exports by causing
the exchange rate to change. This link between interest rates and aggregate
AGGREGATE EXPENDITURES AND THE REAL INTEREST RATE ∂ 683