Question

The 45° line in Keynesian economics indicates .............
(Choose the correct option to fill in the blank)

• A. Income>Consumption
• B. Savings>Investments
• C. Consumption>Income
• D. Income = Consumption

Hint:

In the Keynesian model, the 45° line is not a behavioral function — it’s a reference line that helps to determine equilibrium. At the point where the consumption function intersects the 45° line, all income is consumed, and saving is zero.

Answer 1

The Correct Option is D

In Keynesian economics, the 45° line is a fundamental concept used in the Income-Expenditure (or Keynesian Cross) model. It is a graphical representation that helps in understanding equilibrium in the goods market. This 45° line represents all points where planned expenditure (or consumption) equals actual income. That is: \[ Y = C \] Where:
\( Y \) = National Income or Output
\( C \) = Consumption
At any point on the 45° line, households consume all their income and save nothing. This is typically used to show the equilibrium point in the Keynesian model where aggregate demand equals aggregate supply. Now examining the other options:
(A) Income>Consumption: This implies some savings, and would lie above the consumption function but below the 45° line.
(B) Savings>Investments: This relates to the savings-investment approach, not the 45° line directly.
(C) Consumption>Income: This implies dissaving (negative savings), which lies above the 45° line.
Therefore, the correct interpretation of the 45° line is that it shows all combinations of income and consumption where: \[ \boxed{\text{Income = Consumption}} \]