Assertion (A): The aggregate demand line of the two-sector model is parallel to the consumption function.
Reason (R): The aggregate demand function is obtained by vertically adding to the consumption function an investment function that is a horizontal line.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
Assertion (A): The aggregate demand line of the two-sector model is parallel to the consumption function. — True. Both lines have the same slope c.
Reason (R): The aggregate demand function is obtained by vertically adding to the consumption function an investment function that is a horizontal line. — True. AD is the sum of the consumption and investment functions, and investment is a horizontal line at Ī.
A is about the slope of the AD line. R is about how the AD line is built.
Why R explains A? Adding the same amount Ī at every income lifts the consumption line up without changing its slope. So the AD line keeps the slope c and runs parallel to the consumption function.
NCERT (2026-27): “Investment Function – Graphical Representation In a two sector model, there are two sources of final demand, the first is consumption and the second is investment. The investment function was shown as I = Ī Graphically, this is shown as a horizontal line at a height equal to Ī above the horizontal axis. In this model, Ī is autonomous which means, it is the same no matter whatever is the level of income.” “Aggregate Demand: Graphical Representation 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. … The aggregate demand function is parallel to the consumption function i.e., they have the same slope c. It may be noted that this function shows ex ante demand.” |