Question

The Aggregate Demand (AD) curve lies parallel to consumption curve, indicating that both have _________.

• A. Same components
• B. Different slope
• C. Same slope
• D. Inverse relationship

Hint:

When investment is constant, AD is just an upward shift of the consumption function, so both curves remain parallel.

Answer 1

The Correct Option is C

Concept: AD Curve and Consumption Function
Aggregate Demand (AD) in a simple economy is given by: \[ AD = C + I \] where:

• \(C\) = Consumption function
• \(I\) = Investment (assumed autonomous/constant)

Step 1:Understand relation

• Since investment (\(I\)) is constant, it does not depend on income.
• Therefore, AD differs from the consumption function only by a constant amount.
• This implies that the AD curve is a vertical upward shift of the consumption curve by the amount of investment.

\[ AD \text{ is a vertical shift of } C \]
Step 2:Slope analysis

• The slope of the consumption function is given by the marginal propensity to consume (MPC).
• Since investment is constant, it does not affect the slope of AD.
• Hence, the slope of the AD curve is also equal to MPC.

Step 3:Conclusion

• Both AD and \(C\) have the same slope.
• Therefore, they are parallel to each other.

\[ \text{AD curve is parallel to C curve} \Rightarrow \text{same slope} \]