... the part of their personal disposable income which households choose to spend rather than save, and firms will be generating demand for investment. We can make the general rule that the more personal disposable income households have, the higher their consumption will be. This is very much a rule of thumb, because the amount of the income which households choose to spend and the amount they choose to spend are affected by many factors, but for the purposes of this model this rule will suffice. From this we are able to graph the consumption function, which shows the relationship between personal disposable income and the level of consumption which households will desire: Having said that demand in this model comes from households and firms, we can establish that in this model aggregate demand will be equal to consumption demand by households ...

See this essay or coursework document in full right now