Q.The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have ________. (Choose the correct option to fill in the blank) (A) same components (B) different slope (C) same slope (D) inverse relationship

In a simple two-sector economy, the consumption function describes the relationship between consumption expenditure and income. It is given by $C = \bar{C} + bY$, where $\bar{C}$ is autonomous consumption (consumption independent of income), $b$ is the Marginal Propensity to Consume (MPC), and $Y$ is the level of income. The slope of the consumption curve is $b$.

Aggregate Demand (AD) in this model is the sum of consumption (C) and autonomous investment ($\bar{I}$).

Substituting the consumption function into the AD equation:

Here, $(\bar{C} + \bar{I})$ represents the autonomous expenditure (expenditure independent of income), and $bY$ represents induced expenditure. The slope of the Aggregate Demand curve is also $b$, the Marginal Propensity to Consume. …

To understand why the Aggregate Demand (AD) curve lies parallel to the consumption curve, we need to examine the components and slopes of both.

First, let's consider the consumption function. In Keynesian economics, the consumption function describes the relationship between consumption expenditure and disposable income. It is typically represented as:

$C = \bar{C} + bY$

where:

• $C$ is total consumption expenditure.
• $\bar{C}$ is autonomous consumption (consumption that occurs even when income is zero).
• $b$ is the Marginal Propensity to Consume (MPC), which is the change in consumption for a unit change in income ($\Delta C / \Delta Y$).
• $Y$ is disposable income.

The slope of the consumption curve is given by $b$, the Marginal Propensity to Consume. This value indicates how much of an additional rupee of income is spent on consumption.

Next, let's look at the Aggregate Demand (AD) function. Aggregate Demand represents the total demand for goods and services in an economy at a given price level. In a simple two-sector economy (households and firms), AD is the sum of consumption (C) and investment (I):

$AD = C + I$

Substituting the consumption function into the AD equation:

$AD = (\bar{C} + bY) + I$

In this simplified model, investment ($I$) is often assumed to be autonomous, meaning it does not depend on the level of income. It is determined by factors like interest rates, business expectations, and government policy. Therefore, $I$ is a constant value.

We can rearrange the AD function as:

$AD = (\bar{C} + I) + bY$