Explain the component of ceggregate demand inclosed economy 

 

Components of aggregate demand in a closed economy

AD= C+I

Where C= Private consumption expenditure and I= private investment expenditure

1. Private consumption expenditure

• Private consumption expenditure refers to total expenditure to be incurred by all households on the purchase of goods and services such as food, clothing and housing.
  • Autonomous consumption expenditure is independent of income and is represented by .
  • Induced consumption expenditure is dependent on disposable income.
  • Disposal income is the income from all sources which is available to consumers for consumption and saving.
  • According to Keynes Psychological law of consumption when income of the consumer increases, whole of the income is not spent and a part of income is saved.

• Private investment expenditure refers to planned expenditure by private entrepreneurs on creation of capital goods for profit motive.
  • Autonomous investment expenditure is independent of interest and income
  • Induced investment expenditure is dependent on interest and income