Question

to the aggregate expenditure model, what spending components respond to changes in interest rates?  How do they respond when interest rates rise?  Fall?

Answer 1

In the agg expenditure model change in interest rate effects both consumer spending and investment of the economy . When interest rate rise , cost of loan increases, saving becomes more attractive to the houshold than investment , thus people starts to the save more investment falls, as people have less money they consume less also so when interest rate rises both consumer soending and investment falls agg expenditure curve shifts towards downward.

Exactly opposite thing happens when interest rate falls, saving become less atrractive inveatment increases , consumer spending increases thus agg expendityre all increases. So, we can say, consumer spending and investment has inverse relationship with interest rate in agg expenditure model.