Question:medium
The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have _________.
The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have _________.
Show Hint
When investment is constant, AD is just an upward shift of the consumption function, so both curves remain parallel.
Updated On: Mar 19, 2026
- Same components
- Different slope
- Same slope
- Inverse relationship
Show Solution
The Correct Option is C
Solution and Explanation
Step 1: Understanding the Concept:
In a two-sector model, Aggregate Demand is the sum of Consumption (\(C\)) and Investment (\(I\)).
Step 2: Key Formula or Approach:
\(AD = C + I\)
Step 3: Detailed Explanation:
In basic Keynesian models, Investment (\(I\)) is assumed to be autonomous (fixed at all levels of income).
Since \(AD = C + \text{constant}\), the vertical distance between the \(C\) curve and the \(AD\) curve is always equal to the level of Investment.
Geometrically, two curves that are separated by a constant vertical distance are parallel.
Parallel lines always have the same slope. In this context, the slope of both curves is the Marginal Propensity to Consume (MPC).
Step 4: Final Answer:
The parallel nature implies that they share the same slope (\(MPC\)).
In a two-sector model, Aggregate Demand is the sum of Consumption (\(C\)) and Investment (\(I\)).
Step 2: Key Formula or Approach:
\(AD = C + I\)
Step 3: Detailed Explanation:
In basic Keynesian models, Investment (\(I\)) is assumed to be autonomous (fixed at all levels of income).
Since \(AD = C + \text{constant}\), the vertical distance between the \(C\) curve and the \(AD\) curve is always equal to the level of Investment.
Geometrically, two curves that are separated by a constant vertical distance are parallel.
Parallel lines always have the same slope. In this context, the slope of both curves is the Marginal Propensity to Consume (MPC).
Step 4: Final Answer:
The parallel nature implies that they share the same slope (\(MPC\)).
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