1. Introduction to the Keynesian System
 The Keynesian system is based on the principle of aggregate demand, which can be stated as follows: in the short period (that is, the time period in which productive capacity is fixed within narrow limits), real output and employment are determined by aggregate demand.
 Aggregate demand (AE) is defined as total or aggregate spending for newly produced goods and services.

2. "My spending is your receipt"
Let:
AE denote aggregate demand or aggregate expenditure.
Y is real output or real GDP.
YD is real disposable income.
 For a closed economy without a public sector, the following must be true:
AE  Y  YD [1]

3. The income-expenditure lineAE
AE = Y
Income-expenditure line
450
Real Output = Real Income (Y)

4. The aggregate demand function
 The aggregate demand or aggregate expenditure function (AE) reveals the plans of spending units at alternative levels of real income
 In a closed economy with no public sector:
AE = C + I [2]
 Thus, developing a theory of aggregate demand logically begins with a theory of consumption and a theory of investment.

5. The consumption function
Definitions:
Autonomous consumption (C a) : Consumption spending determined independent of income.
Ave. propensity to consume (APC):Ratio of consumption to real disposable income (YD). That is: APC = C/YD
Marginal propensity to consume (MPC= c) : The change in consumption resulting from a one unit change in disposable income. That is : MPC =c= C/YD.
Ave. propensity to save (APS): Ratio of saving to real disposable income. That is: APC = S/YD.
Marginal propensity to save (MPS): The change in saving resulting from a one unit change in disposable income. That is: MPS =S/YD.

6. The consumption function, slide 2
 The consumption function can be expressed mathematically by:
C =C a + cYD [3]
 The fundamental psychological law of consumption can be stated as follows: People are disposed, as a rule and on average, to increase their consumption when their income increases; but not by as much as the increase in income.
Thus, we can say:
0 < c < 1

7. The MPC and the MPS
The consumption function is given by: C = YD

8. The consumption function
C = YD
C = YD
300 S
240
C/YD = 1 YD C
100 30
100
300 YD

9. Slope of the consumption function
Slope = C/YD = 70/100 = .7
C = YD
310 C
240
YD
100 30
300
400
100 YD

10. The slope of the saving function is given by MPS
S = YD 30
200 YD
100
-30

11. Shifts of the consumption function
The function could shift due to: C C2 C1
A change in household wealth
A change in consumer confidence.
Change in price or availability of credit. C0 YD