Question

What is the income=expenditure line called in the Keynesian Cross Diagram?

a) Macroeconomic equilibrium line

b) 45-degree line

c) Potential GDP line

Answer 1

Figure 1 contains two lines that serve as conceptual guideposts to orient the discussion. The first is the aggregate expenditure line that we’ve already discussed. The second conceptual line on the Keynesian cross diagram is the line showing where national income = aggregate expenditure. This line is mathematically the 45-degree line, which starts at the origin and reaches up and to the right. A line that stretches up at a 45-degree angle represents the set of points (1,1), (2,2), (3,3) and so on, where the measurement on the vertical axis is equal to the measurement on the horizontal axis. Thus in this diagram, the 45-degree line shows the set of points where the level of aggregate expenditure in the economy, measured on the vertical axis, is equal to the level of output or national income in the economy, measured by GDP on the horizontal axis. In short, this is our equilibrium condition. The combination of the aggregate expenditure line and the income=expenditure line (i.e. the 45 degree line) is the Keynesian Cross.

So income= expenditure depicts 45 degree line.

So B part is a correct answer

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