 After discussing many issues related to money, that is money demand, measurement of money and finally central banks actions and operations to change money supply in the economy. Now we are moving to another topic which is very important in the sense that whenever central bank changes its monetary policy or it takes a policy decision then how does that policy decision effect real variables in the economy that needs a macroeconomic model or a macroeconomic framework. So now we are starting money related theory so that we discuss a macroeconomic model or macroeconomic framework which will be available to us for analyzing monetary policy decisions. So the first important point we will start from is that our model is called aggregate demand aggregate supply model so we will start from aggregate demand. So first of all what are the components of aggregate demand? So in the components of aggregate demand then we can go when we have this idea that what is aggregate demand? What is its definition? So in that we see that there are planned expenditures and actual expenditures. The planned expenditures are the intentions that we should do so much expenditure, we should purchase these goods and services, what are the intentions or what is the plan, this is for your private consumers, this is for businesses, this is for government, and this is for foreigners that how much goods and services should be purchased and how much expenditure should be done for that. When these expenditures actually happen then we call them actual expenditures. So what is aggregate demand? Aggregate demand is planned expenditure which is the intention or the desire that given market prices should be purchased, if we look at the aggregate level total planned expenditures then we say that this is the aggregate demand of this economy. Now there are four components of aggregate demand and what are those four components? First is consumption, second is planned investment, third government purchases, and fourth net exports. So if we mix these four then what will be the aggregate demand? Now we will discuss one by one of them so that we can develop our macro model. So the first component is consumption expenditure. We want to clarify which consumption is this. So remember that this consumption is of households. The common private sector, the common families, the common households, the people, we count their consumption expenditure. We count the consumption expenditure in the aggregate demand in the head of consumption for a year. This means that this is a private consumption, the consumption of the private sector. This includes goods, services, and there are also durable goods and non-durable goods. This means that there is also furniture which comes in durable goods while there is paper and pencil which comes in non-durable goods. Now the next question is that if this consumption expenditure is there then for the macro model we also need to know which factors affect this consumption or what is its determining factor? Who determines the value of consumption? So the most important determinant of consumption will be in your mind and it will be in the mind of a common man that the biggest determinant of consumption is income. And more precisely, if I say this, then income may be disposable income. Now what is disposable income? When you minus the taxes from income, then the other consumable income or disposable income remains. So disposable income is the main determinant of consumption. This means that now we are in a position to write consumption function because we know that consumption is a function of our consumption is dependent on disposable income. So we write consumption function as c is equal to c0 plus mpc multiplied by yd. Here c is consumption, c0 is autonomous expenditure, mpc is marginal propensity to consume and I will define it later multiplied by disposable income and disposable income is income minus tax. So autonomous expenditure means part of expenditure that is independent of current income i.e. it does not depend on income. Even if the income is not there, even then the part of expenditure is there. So then what does it depend on? It can depend on wealth, it can depend on future income. So it has its own determinants but it does not depend on current income. But the second part of mpc multiplied by yd is the part of consumption which is induced by disposable income. And what is mpc in this? mpc is how much consumption will change if a change is given in the income. For example, if the increase in the income of 100 rupees increases, then how much will increase in consumption? This is marginal propensity to consume. And the value of mpc is between 0 and 1. i.e. if the income increases by 100 rupees, then the expenditure increases between 0 and 100. i.e. the value of mpc is between 0 and 1. Another component of our aggregate demand is government purchases. Now what does government purchases mean? The expenditure government also buys goods and services. Labor services, pen and paper. So government institutions purchase. Government public services. To deliver, they purchase from the inputs market. So the government also has to do the expenditure. But the expenditure of the government is not the function of income. Rather we take them as exogenous. We assume that the expenditure of the government is exogenous according to the income. i.e. it is not dependent on the income. But the taxes imposed to finance the expenditure of the government are mostly imposed on the income. Thank you.