Question

In the aggregate demand diagram, if OM = \(\overline{C}\) and OJ = \(\overline{I}\) are measured on the vertical axis, then OL represents:

Options

• \(\overline{C}\) − \(\overline{I}\)

• \(\overline{C}\) + \(\overline{I}\)

• cY, the induced component of consumption

• \(\overline{I}\) alone

Answer 1

Since aggregate demand is the vertical addition of the consumption and investment functions, the intercept of the aggregate demand line equals the sum of the two intercepts. Thus OL = \(\overline{C}\) + \(\overline{I}\), where OM = \(\overline{C}\) and OJ = \(\overline{I}\).