 Last time we talked about the consumption function remember that consumption is equal to Autonomous consumption plus the marginal propensity to consume MPC Time times disposable income. So when disposable income goes up Planned consumption goes up. How much you want to buy goes up How much does it go up? If your doll if your income goes up by a dollar, how much will your consumption go up by? It depends on the size of the marginal propensity to consume if their marginal propensity to consume is one half Then when your income goes up by a dollar you your spending will go up by 50 cents or a half That defines the slope of this curve This defined by how big their marginal propensity to consume is if your marginal propensity to consume is higher see 75% Then when income goes up and you spend 75 cents the slope will be higher so GDP then according to our simple model depends on consumption now, let's add investment to that Investment in plant and equipment investment in housing What determines how big? investment is Well one important factor that we'll talk about later in the class is Interest rates when interest rates go up it costs more to borrow money to buy a house So housing investment will go down if the interest rates fall mortgage rates fall People can afford to buy more houses. So investment will go up the same as holds true for plant and equipment But we're going to set that to one side because we want our model to be simple So instead we'll just say that people choose how much investment they want Depending on a number of factors that we're not even going to explain at the moment So how do we represent that on a graph? Well on the vertical axis we'll put investment just as over here we put consumption on the horizontal axis will once again Put disposable income and we'll say in the economy at any particular time Investment is just I zero a certain amount that people want to invest say Now the next thing that we want to do is add these two things together to get a Picture of how much spending there is in our economy. So what we want to do is add investment to consumption How do we do that? Well, we're going to draw a new graph and on our new graph We're going to call it plan Spending that is how much households want to consume how much businesses want to invest and we're just going to add these two things together So we have the consumption Down here by the way we have once again Income disposable income so we have the consumption And we want to add to that Investment and remember before we had investment was equal to say a hundred dollars So at every point here, we're just going to add a hundred dollars or we have it plan spending at every level of disposable income is equal to consumption plus investment Next time we're going to show you what we mean by Equilibrium income and how we can get from here to how much spending there is actually in the economy