In a diagram with the consumption function, the shows all points where disposable income equals consumption expenditures.
A) consumption function
B) saving function
C) 45- degree line
D) aggregate demand curve

Question

Quizplus · Accepted Answer

The 45-degree line in a diagram represents all points where disposable income equals total spending (which includes consumption expenditures). This is because any income that is not saved (i.e. saved income would be plotted on the saving function) must be spent, and so at the point where income equals spending, the two intersect on the 45-degree line. Therefore, the 45-degree line represents where the consumption function intersects with the saving function, and shows the equilibrium level of income and spending in the economy.

In a Diagram with the Consumption Function, the Shows All