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Economics and the 2008 crisis: a Keynesian view
Economics and the 2008 crisis: a Keynesian view

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4.1 Modelling planned saving (1)

A good way to make our diagram work for us to show planned saving (the difference between income and planned consumption) is to start by reflecting each value of income plotted on the horizontal axis on to the vertical axis where planned consumption is plotted. This will make it easy to compare visually each level of income with its corresponding level of planned consumption. So let’s start with just the two scaled axes and imagine that each value of income emits a ray of light vertically. A mirror is held diagonally to reflect that ray on to the vertical axis. Click on each circle on the bar underneath the chart, working from left to right to watch this process build up step by step.

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Figure 7 Building the 45-degree line
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The line we have traced out is called, for obvious reasons, the 45-degree line, and it shows us at a glance how far up from the horizontal axis any value of income would appear if we plotted it on the vertical axis. At any point on the line, the variable plotted on the vertical axis – planned consumption – is equal to the variable plotted on the horizontal axis – income.