Keynesian Economics

In Keynesian economics, the 45° line is a fundamental concept used in the Income-Expenditure (or Keynesian Cross) model. It is a graphical representation that helps in understanding equilibrium in the goods market. This 45° line represents all points where planned expenditure (or consumption) equals actual income. That is: Where:
= National Income or Output
= Consumption
At any point on the 45° line, households consume all their income and save nothing. This is typically used to show the equilibrium point in the Keynesian model where aggregate demand equals aggregate supply. Now examining the other options:
(A) Income>Consumption: This implies some savings, and would lie above the consumption function but below the 45° line.
(B) Savings>Investments: This relates to the savings-investment approach, not the 45° line directly.
(C) Consumption>Income: This implies dissaving (negative savings), which lies above the 45° line.
Therefore, the correct interpretation of the 45° line is that it shows all combinations of income and consumption where:

Marginal Propensity to Consume (MPC) measures how much consumption changes with a change in income. It is defined as: Where: - is the change in consumption, - is the change in income. This ratio reflects the responsiveness of consumption to income, and hence, MPC is the slope of the consumption function. The consumption function shows the relationship between income and consumption, generally written as: In this function: - is autonomous consumption (when income is zero), - represents induced consumption (changes with income). The slope of this linear function — which is MPC — tells us how much additional consumption is generated by an additional unit of income. Thus, the correct functional relationship is with the Consumption function. Options like production and cost (Options C and D) are unrelated, and the saving function is governed by Marginal Propensity to Save (MPS), not MPC.