where is consumption, is GDP, is taxes, is the nominal interest rate, and is the expected rate of inflation. Higher disposable income or a lower real interest rate (nominal interest rate minus expected inflation) leads to higher consumption spending.
where is physical investment and is GDP in the previous period. Higher lagged income or a lower real interest rate leads to higher investment spending.
, government spending, is an exogenous variable.
where is net exports, is the nominal exchange rate (the price of domestic currency in terms of units of the foreign currency), is GDP, and is the combined GDP of countries that are foreign trading partners. Higher domestic income (GDP) leads to more spending on imports and hence lower net exports; higher foreign income leads to higher spending by foreigners on the country's exports and thus higher net exports. A higher e (more expensive domestic currency in terms of foreign currency, and equivalently less expensive foreign currency in terms of domestic currency) leads to more purchasing of foreign goods due to the lesser cost of acquiring the foreign currency to pay for them, and also leads to less purchasing of the country's exports by foreigners since they find it more costly to acquire the country's currency with which to pay for them; for both reasons, higher e leads to lower net exports.
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is consumption, 
is GDP, 
is taxes, 
is the nominal interest rate, and 
is the expected rate of inflation. Higher disposable income or a lower real interest rate (nominal interest rate minus expected inflation) leads to higher consumption spending.
is physical investment and 
is GDP in the previous period. Higher lagged income or a lower real interest rate leads to higher investment spending.
, government spending, is an exogenous variable.
is net exports, 
is the nominal exchange rate (the price of domestic currency in terms of units of the foreign currency), 
is the combined GDP of countries that are foreign trading partners. Higher domestic income (GDP) leads to more spending on imports and hence lower net exports; higher foreign income leads to higher spending by foreigners on the country's exports and thus higher net exports. A higher e (more expensive domestic currency in terms of foreign currency, and equivalently less expensive foreign currency in terms of domestic currency) leads to more purchasing of foreign goods due to the lesser cost of acquiring the foreign currency to pay for them, and also leads to less purchasing of the country's exports by foreigners since they find it more costly to acquire the country's currency with which to pay for them; for both reasons, higher e leads to lower net exports.
