Understanding the 45-Degree Model in Macroeconomics

The 45-degree line diagram represents equilibrium where aggregate expenditure equals national income. It's crucial for understanding macroeconomic balance and the dynamics between spending and output.

Aggregate expenditure is the total spending on an economy's goods and services. It includes consumption, investment, government spending, and net exports. It drives the demand side of the economy.

National income measures the monetary value of the flow of output of goods and services produced in an economy over a period. It equals total income earned by factors of production.

At the equilibrium point on the graph, every dollar of income is matched by a dollar of expenditure. This intersection signifies no unintended changes in inventories, implying a macroeconomic balance.

On a graph, the 45-degree line runs from the origin at a perfect diagonal. Any point on this line reflects an equality of the values on both the X (income) and Y (expenditure) axes.

When aggregate expenditure is less than national income, it indicates a surplus and potential recession. Conversely, expenditure exceeding income suggests a deficit and can lead to inflation.

Governments and central banks monitor deviations and use fiscal or monetary policy to steer the economy back to equilibrium, ensuring sustainable growth and stable prices.