In graphical representation, how is the aggregate demand function obt…

The correct answer is Option (1) → By adding the consumption and investment functions vertically.

In a simple two-sector (household and firm) Keynesian model of income determination, aggregate demand (AD) is the sum of consumption expenditure (C) and investment expenditure (I).

• Consumption Function (C): This shows the relationship between disposable income and consumption spending. Graphically, it's typically an upward-sloping line.

  Investment Function (I): In this simplified model, investment is often assumed to be autonomous, meaning it does not depend on the level of income. Graphically, it would be a horizontal line.

• The Aggregate Demand function shows the total demand (made up of consumption + investment) at each level of income. Graphically it means the aggregate demand function can be obtained by vertically adding the consumption and investment function.

Here, OM = $\bar C$

OJ = $\bar I$

OL = $\bar C$ + $\bar I$

The aggregate demand function is parallel to the consumption function i.e., they have the same slope c.