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Because the interest rate affects opportunity cost of holding money/spending it. Higher interest increases the future value of current money, and this change the optimal allocation decision of it in the present. For example, the less valuable money is in the future, the more of it you would expect people to spend now.

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Q: Why does the real interest rate affect planned aggregate expenditure?
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The interest rate does affect aggregate demand. As the interest rate falls, aggregate demand increases and vice-versa.


Why aggregate income is equal to aggregate expenditure?

One man's income is another man's expenditure. The expenditure of buyers on products is, by the rule of accounting, income to the sellers of those products. Every transaction that affects income must affect expenditure. If, for example, a company produces and sells one extra loaf of bread. This transaction will raise total expenditure on bread, but it also has an equal effect on income. If the company produces the extra loaf without hiring any more labour (such as making the production process more efficient), then profit increases. If the company produces the loaf by hiring more labour, then wages increase. In both cases, expenditure and income increase equally.


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ra Interest rates affect our purchases in a couple different ways. If taking out a loan, then a lower interest rate is obviously preferred to minimize your long term expenditure. If viewing an investment prospectus, the return on investment (ROI) is often represented as an interest rate and a higher value is preferred to maximize your earnings.


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