Question

In the theory of effective demand theory what does the 45° line show?

• A. Y = AD
• B. AD = AS
• C. Market equilibrium line
• D. All of these

Hint:

The 45° line in effective demand theory represents the equilibrium point where aggregate demand equals aggregate supply, and total output equals total spending.

Answer 1

The Correct Option is D

Step 1: Understanding the 45° line in effective demand theory.
The 45° line in the effective demand theory represents the point where aggregate demand (AD) equals aggregate supply (AS). It is used to illustrate the equilibrium level of income and output in the economy. The 45° line indicates that every point on the line represents a situation where total spending (AD) equals total output (AS).

Step 2: Analyzing the options.
(A) Y = AD: Correct. At the 45° line, output (Y) is equal to aggregate demand (AD). This represents equilibrium in the economy.
(B) AD = AS: Correct. The 45° line also shows the point where aggregate demand (AD) equals aggregate supply (AS), which is a key concept in determining equilibrium output.
(C) Market equilibrium line: Correct. The 45° line represents the market equilibrium line, where the supply and demand curves intersect.
(D) All of these: Correct. All of the above options are correct representations of what the 45° line shows in the context of effective demand theory.

Step 3: Conclusion.
The 45° line shows All of these, as it represents the points where Y = AD, AD = AS, and is the market equilibrium line. Thus, the correct answer is (D).