What is significance of 45 degree …

Aggregate demand is the total demand for goods and services in the economy at a given point in time. It is the sum total of the demand for the actual output in the economy by each sectors operating within the economy. It represents the total demand for the goods and services produced and consumed in the economy.

Aggregate supply is the total quantity of the commodity that is offered for sale in the market at any particular point of time. It is the total quantity of commodities and services that the firms are willing and able to sell in the market. It is represented by the upward sloping 45-degree line.

The 45° line represents all points at which aggregate demand and aggregate supply (total output) are equal. The AD curve is the upward-sloping curve that starts from a point above the origin. The point where AD curve intersects the 45-degree line is the equilibrium point. This point represents the total output that the economy produces and sells without creating any disturbances in the economy. The 45-degree line depicts the points where AD=AS. Any deviations of AD from this point is bound to create economic distortions either in the form of the inflationary gap or deflationary gap.