In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that: A) Y = PAE. B) PAE = C + I^p + G + NX. C) I ≠ I^p. D) Y* = Y.

Question

Quizplus · Accepted Answer

The 45° line represents the condition that output (Y) equals planned aggregate expenditure (PAE) in the short run. In other words, it is the level of output where the goods and services produced equals the ones demanded by households, firms, and the government. Therefore, the correct statement is A) Y = PAE.

In the Keynesian Cross Diagram, the 45° Line Represents the Short-Run