Under the Keynesian theory, 'Reference Line' is a straight line passing through the origin drawn at an angle o

Question 84 of 104

Q. Under the Keynesian theory, 'Reference Line' is a straight line passing through the origin drawn at an angle of ________. (Choose the correct option to fill in the blank) (A) 25° (B) 45° (C) 55° (D) 75°

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Concept understanding — Aggregate Demand Equilibrium

Aggregate Demand Equilibrium: The Economy's Balancing Act

Think of a seesaw. On one side sits everything people, firms, and the government want to buy. On the other side sits everything firms produce. When the seesaw is perfectly level — when total spending exactly matches total output — the economy is in equilibrium. That's the core idea.

But why should you care? Because when the seesaw tilts, real things happen. If spending exceeds output, prices rise (inflation). If output exceeds spending, factories shut down and people lose jobs. Equilibrium is the sweet spot where neither happens.

The Precise Meaning

In macroeconomics, Aggregate Demand (AD) is the total planned spending on final goods and services in an economy during a given period. Aggregate Supply (AS) is the total output firms plan to produce.

Equilibrium occurs where:

AD = AS

At this point, what buyers intend to spend exactly equals what sellers intend to produce. No unwanted inventories pile up, and no shortages force prices up. The economy is "at rest."

Y = C + I + G + (X - M)

This is the AD identity from your NCERT textbook. It tells you that total spending in the economy comes from four sources: households, firms, government, and foreigners (net of what we buy from them).

How Equilibrium Actually Works

Imagine a simple economy with only households and firms. Households earn income $Y$ from firms. They spend part of it on consumption $C$ and save the rest $S$ . Firms produce output and also invest $I$ (buying machines, building factories).

Equilibrium condition becomes:

Y = C + I

But households don't spend all their income. They save. So $C = Y - S$ . Substituting:

Y = (Y - S) + I

Which simplifies to:

S = I

Important

In equilibrium, planned savings must equal planned investment. This is the Keynesian cross condition. If people save more than firms invest, total spending falls short of output — inventories pile up, firms cut production, and income falls until savings and investment match again.

The 45° Line Diagram (Describe It)

Draw a graph with Aggregate Demand (AD) on the vertical axis and National Income (Y) on the horizontal axis.

Draw a 45° line from the origin. Every point on this line represents $AD = Y$ — the equilibrium condition.
Draw the AD curve (which is $C + I + G + (X-M)$ ). It slopes upward because as income rises, consumption rises.
Where the AD curve crosses the 45° line — that's the equilibrium point. …

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In Keynesian theory, the 'Reference Line' (or 45-degree line) graphically represents all points where aggregate expenditure equals national income, which is the equilibrium condition. This line is drawn at an angle of 45°.

In Keynesian economics, particularly within the income-expenditure model (often called the Keynesian Cross model), the 'Reference Line' plays a crucial role in determining the equilibrium level of national income. This line is a graphical representation of the condition where aggregate expenditure ( $AE$ ) is equal to national income ( $Y$ ).

The model typically plots aggregate expenditure on the vertical axis and national income (or output) on the horizontal axis. For the economy to be in equilibrium, the total amount of goods and services produced (national income, $Y$ ) must be equal to the total amount of goods and services that people plan to spend (aggregate expenditure, $AE$ ). This fundamental equilibrium condition is $Y = AE$ .

To visually represent this identity on a graph where both axes have the same scale, a straight line is drawn from the origin at an angle of 45 degrees. Every point on this 45-degree line indicates that the value on the horizontal axis (national income) is exactly equal to the value on the vertical axis (aggregate expenditure). For instance, if national income is $100, then aggregate expenditure is also$ 100 at that point on the 45-degree line. …

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Q.Under the Keynesian theory, 'Reference Line' is a straight line passing through the origin drawn at an angle of ________. (Choose the correct option to fill in the blank) (A) 25° (B) 45° (C) 55° (D) 75°

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