Which of the following statements about the aggregate demand function of the two-sector model is NOT correct?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Its slope is equal to the marginal propensity to save.
The AD line is the consumption line plus the flat investment line. So it has the same slope c as the consumption line, and its intercept is C̄ + Ī.
Option (1) It is parallel to the consumption function. — True. Adding a flat line does not change the slope, so the two lines are parallel.
Option (2) It is obtained by vertically adding the consumption function and the investment function. — True. AD is the vertical sum of consumption and investment at each income.
Option (3) Its slope is equal to the marginal propensity to save. — False. The slope of AD is c, the marginal propensity to consume, not the MPS.
Option (4) Its intercept on the vertical axis is equal to C̄ + Ī. — True. At zero income AD = C̄ + Ī, the distance OL in the figure.
NCERT (2026-27): “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.” |