Capital: any resource used in the production of GDP.

Capital Stock: net investment + K stock at a single point in time

investment: purchases of final goods by firms plus purchases of newly produced residences by households. I= gross investment - depreciation

public infrastructure investment: the purchase of capital by government for use as public goods

investment share: the proportion of GDP that is used for investment; equals investment divided by GDP, or I/Y. excludes Gov. investment.

consumption share: the proportion of GDP that is used for consumption; equals consumption divided by GDP

net exports share: the proportion of GDP that is equal to net exports; equals net exports divided by GDP

government purchases share: the proportion of the GDP that is used for Gov. purchases; equals Gov. purchases divided by GDP, or G/Y

equilibrium interest rate: the interest rate that equates the sum of consumption, investment, and net export shares to the share of GDP available for non government use.

crowding out: the decline in private investing owning to an increase in government purchases

national saving rate: the proportion of the GDP that is saved, neither consumed nor spent on government purchases; equals national saving (S) divided by GDP, or S/Y. it also equals 1 minus the government purchases share of GDP - Consumption.

Savings = Total income -- Consumption -- Gov.

S = I + NX

S/Y = national savings rate

the share of GDP not used by gov. is the share available for private consumption. the price used to signal to the private sector how much to consume is the interest rate.

Y=C+I+G+X

consumption, investment, and exports are all negatively correlated with interest rates.

increased Gov. spending causes the interest rate to inc. (they are positively correlated)

consumption decreases as interest rates rise because banks then pay out more on savings, motivating individuals to save more, and consume less.

investment decreases when interest rates rise because most investments--new manufacturing plants, new homes etc. require loans. when interest rates rise, loans become more costly and investment falls

exports decrease when interest rates rise because when interest rates rise relative to banks around the world, foreign investors are motivated to put their savings into American banks in American currency, this increased demand for American currency causes the value of the dollar relative to other countries to increase (the exchange rate). when the dollar has increased in value relative to other countries it is attractive to buy goods imported from other countries because you can get more for your dollar. conversely it is less attractive for consumers in other countries to purchase American goods because they get less for their money.

so, because increased interest rates increase the exchange value of the dollar, they also decrease exports.