Page 2 - Home Assignment- AD and related concepts

• Government Expenditure. (G)

It refers to total expenditure incurred by the Government on
consumer goods and capital goods to satisfy the common needs of the
economy
• Investment Expenditure. (I)

It refers to total expenditure incurred by all the private firms on capital
goods.
• Net exports. (X - M)

The difference between exports and Imports is termed as net exports.

Aggregate demand in a four-sector model: -

= + + + ( − )

Aggregate demand in a Two sector model: -

AD = C + I

Consumption Function: -

The functional relationship between consumption expenditure and
national income is known as consumption function.

C = ( )

There exists a direct relationship between consumption expenditure and
national income.

Consumption function is broadly classified under two heads.
1. Autonomous consumption ( : - At zero level of national

income certain amount money is spent on consumption
expenditure for survival purpose. It is known as autonomous
consumption.
2. Induced consumption ( ):-

It is the portion of consumption that varies with disposable
income. It is obtained by multiplying MPC with national income.
• Consumption function is denoted as: = +
0

Example; -In an economy the consumption function is given as =50 + 0.5 .
Then find out

a. Autonomous consumption.