Explain the component of ceggregate demand inclosed economy
Components of aggregate demand in a closed economy
Where C= Private consumption expenditure and I= private investment expenditure
- 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
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