With reference to the given diagram, OL indicates __________ .
(Choose the correct option to fill in the blank)
(i) Autonomous Consumption
(ii) Autonomous Investment
(iii) Induced Consumption
(iv) Induced Investment
With reference to the given diagram, OL indicates __________ .
(Choose the correct option to fill in the blank)
(i) Autonomous Consumption
(ii) Autonomous Investment
(iii) Induced Consumption
(iv) Induced Investment
Show Hint
- Only (i)
- Only (ii)
- Sum of (i) and (ii)
- Sum of (i) and (iii)
The Correct Option is C
Solution and Explanation
The diagram has the AD line starting at L, the investment line I at height J and the consumption line starting at M.
OL is the height at which the AD line starts on the vertical axis. It is the intercept of AD.
Step 2: Recall what AD is made of:
AD = C + I. At zero income, C = OM, which is autonomous consumption.
Investment is a flat line at OJ, so autonomous investment is OJ.
Step 3: Add the two parts:
At zero income, AD = OM + OJ. This is the distance OL.
So OL = autonomous consumption + autonomous investment, which is (i) + (ii).
Step 4: Why the other options are wrong:
(A) Only (i): autonomous consumption alone is OM, which is smaller than OL.
(B) Only (ii): autonomous investment alone is OJ, which is smaller than OL.
(D) Sum of (i) and (iii): induced consumption is MPC x Y. It depends on income and is zero at zero income, so it cannot be part of an intercept.
Final Answer:
OL = autonomous consumption + autonomous investment. Option (C).
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