variable Y represents real output or real income. From Chapter 2, we know that the value of the produced goods and services (real output) has to be equal to the value of the income earned in producing the goods and services (real income). The variable C represents the consumption of goods and services. The variable I represents investment by the firms. When firms purchase new capital goods, this counts as investment. When firms experience a change in their inventories, this also counts in the investment category of GDP. The variable G represents the government’s spending on newly produced goods and services. The variable T represents lump sum taxes, and Y − T represents disposable income. The variable M represents the nominal money supply, P is the price level, and M/P is the real money supply. The variable r is the real interest rate. The variable (M/P)d represents real money demand. Consumption depends positively on disposable income, investment depends negatively on the real interest rate, and real money demand depends positively on real income and negatively on the real interest rate.