AGGREGATE DEMAND AND AGGREGATE SUPPLY| PRACTICE QUESTION | CA FOUNDATION | CLASS 12 | HITESH NANKANI
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The consumption equation in the context of Aggregate Demand (AD) and Aggregate Supply (AS) reflects how household consumption contributes to overall economic demand. It is typically expressed as:
𝐶=𝑎+𝑏𝑌𝑑
C=a+bY d
where
C is consumption,
a represents autonomous consumption (spending independent of income),
b is the marginal propensity to consume (the fraction of additional income spent), and
𝑌𝑑 is disposable income (total income minus taxes). This equation shows that consumption increases with higher disposable income, directly influencing AD. Higher consumption shifts the AD curve rightward, indicating increased demand in the economy.
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