Chapter 9: Aggregate Expenditure and Output in the Short-Run

Question 1

What is the aggregate expenditure model?

Answer 1

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

Question 2

What is a key idea of the aggregate expenditure model?

Answer 2

In a particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

Question 3

What are the 4 components of aggregate expenditure?

Answer 3

• Consumption (C): spending by households on goods and services, such as groceries, cars and restaurant meals.
• Planned investment (I): planned spending by firms on capital goods, such as factories, office buildings and machinery, and by households on new dwellings.
• Government purchases (G): spending by federal, state and local governments on goods and services, such as roads, bridges and the salaries of employees, such as teachers and nurses.
• Net exports (M-N or NX): spending by foreign firms and households on goods and services produced in Australia minus spending by Australian firms and households on goods and services produced in other countries.

Question 4

What is the aggregate expenditure equation?

Answer 4

Aggregate expenditure = consumption + planned investment + government purchases + net exports
AE = C + I + G + NX

Question 5

What is the difference between planned investment and actual investment?

Answer 5

We can begin resolving this puzzle by remembering that goods that have been produced, but not yet sold, are referred to as inventories. Changes in inventories are included as part of investment spending on machinery, equipment, office buildings and factories. We assume that businesses always spend the amount they planned on machinery and office buildings, but the amount businesses plan to spend on inventories may be different from the amount they actually spend.
For the economy as a whole we can say that actual investment spending will be greater than planned investment spending when there is an unplanned increase in inventories. Actual investment spending will be less than planned investment spending when there is an unplanned decrease in inventories.
Therefore, actual investment will equal planned investment only when there is no unplanned change in inventories.

Question 6

What are inventories?

Answer 6

Goods that have been produced by not yet sold.

Question 7

What is macroeconomic equilibrium?

Answer 7

It is similar to microeconomic equilibrium. For the economy as a whole, macroeconomic equilibrium occurs where total spending, or aggregate expenditure, equals total production, or GDP:
Aggregate expenditure = GDP

Question 8

What does an increase in real GDP do?

Answer 8

Over the long run, when real GDP in Australia increases and the standard of living rises due to increases in production and productivity resulting from increases in technology and capital.

Question 9

What happens when the aggregate expenditure is greater than GDP?

Answer 9

When this happens the total amount of spending in the economy is greater than the total amount of production, in turn adjustments need to be made. In this situation, many businesses will sell more goods and services than they had expected.
In summary: when aggregate expenditure is greater than GDP, inventories will decline and GDP and total employment will increase.

Question 10

What is an example of the effect of spending in an economy being greater than GDP?

Answer 10

The manager of a Bunnings store might like to keep 5000 metres of timber in stock to give customers the opportunity to see a range of different varieties, qualities and sizes. If sales are unexpectedly high, the store may end up with only 2000 metres of timber. In that case, the store will have an unplanned decrease in inventories: its inventory of timber has declined by 3000 metres. The store manager will react by ordering more timber. If other stores are experiencing a similar sales increases they will do the same. Then timber manufacturers will significantly increases their production. These manufactures may also increase the number o workers they hire. If the increase in sales is affecting not just timber, but also other building supplies, furniture, restaurant meals etc. then GDP and total employment will begin to increase
In summary: when aggregate expenditure is greater than GDP, inventories will decline and GDP and total employment will increase.

Question 11

What happens when aggregate expenditure is less than GDP?

Answer 11

In this situation, many businesses will sell fewer goods and services than they had expected, so their inventories will increase.
For example, the manager of the Bunnings store who wants 5000 metres of timber in stock may find that because of slow sales the store has 7500 metres, so the store manager will cut back on orders for timber. If other stores also cut back on their orders, timber manufacturers will reduce and lay off workers.
If the decrease in sales is affecting not just timber but also many other goods and services, GDP and total employment will begin to decrease. In summary: when aggregate expenditure is less than GPD, inventories will increase and GDP and total employment will decrease. Only when aggregate expenditure equals GDP will firms sell what they expected to sell. In that case, their inventories will be unchanged and they will not have an incentive to increase or decrease production.

Question 12

How is the level of aggregate expenditure determined in the economy?

Answer 12

To figure this out we look more closely at the components of AE. Consumption is the largest component of AE, this is followed by government purchases and then investment.

Question 13

What are the 4 components of aggregate expenditure?

Answer 13

• Consumption
• Investment
• Government
• Net exports

Question 14

What 5 variables determine the level of consumption?

Answer 14

1. Current disposable income
2. Household wealth
3. Expected future income
4. The price level
5. The interest rate

Question 15

Explain the following variable that determines the level of consumption: current disposable income

Answer 15

This is the most important determinant of consumption. The main reason for the general upward trend in consumption is that disposable income has followed a similar upward trend.
Disposable income is the income households have after they have paid individual income tax and received government transfer payments, such as social security. For most households, the higher their disposable income the more they spend, and the lower their income the less they spend.

Question 16

Explain the following variable that determines the level of consumption: household wealth

Answer 16

Consumption also depends in part on the wealth of households.
A households wealth = the value of its assets – the value of its liabilities. Therefore, when the wealth of households increases, consumption should increases and vice versa.
A households assets include: its home, share, bond holdings and bank accounts
A households liabilities include: any loans that it owes.

Question 17

Why are shares an important category of household’s wealth?

Answer 17

Because when the wealth of households decreases, consumption should decrease. Share are an important category of household wealth mainly because every employee in Australia has a superannuation account and shares make up a high proportion of these accounts.
As a result, a decline in share prices should lead to a decline in consumption.

Question 18

Explain the following variable that determines the level of consumption: expected future income

Answer 18

Consumption depends in part on expected future income. Most people prefer to keep their consumption fairly stable from year to year, even if their income fluctuates significantly.
Real estate agents (who work on commission) can easily have fluctuating income. As a result, during good years they try to keep their consumption steady and then drastically cut back during the slower years.
We can conclude that current income explains current consumption well, but only when current income is not unusually high or unusually low compared with expected future income.

Question 19

Explain the following variable that determines the level of consumption: the price level

Answer 19

The price level measures the average prices of goods and services in the economy. Changes in theprice level affect consumption
Changes in the price level affect consumption mainly through their effect on household wealth. An increases in the price level will result in a decrease in the Real value of household wealth.

Question 20

Explain the following variable that determines the level of consumption: the interest rate

Answer 20

When the interest rate is high, the reward for saving is increased and households are likely to save more and spend less. However, it should be remembered that many households are net enders and therefore as the interest rate rises, their wealth increases, which may lead to increases consumer spending.
Use real interest rate (not nominal) because households are concerned with the payments they will make or receive after the effects of inflation are taken into account.
Spending on durable goods is the most likely to be affected by change in the interest rate because a high real interest rate increases the cost of spending financed by borrowing.

Question 21

What are the three categories consumption sending can be divided into?

Answer 21

1. Spending on services (such as medical care, education and haircuts)
2. Spending on non-durable goods (such as good and clothing)
3. Spending on durable goods (such as cars and furniture)

Question 22

What is the consumption function?

Answer 22

This illustrates the relationship between consumption and disposable income. The slope of the consumption function is the marginal propensity to consume (MPC).

Question 23

What is the marginal propensity to consume (MPC)?

Answer 23

This is the proportion of the change in disposable income that is spent on consumption (the slope of the consumption function).
MPC = change in consumption/change in disposable income = ΔC/ ΔYD
Change in consumption = change in disposable income x MPC

Question 24

What is the relationship between consumption and national income?

Answer 24

The first step in examining the relationship between consumption and GDP is to recall that the differences between GDP and national income are small and can be ignored without affecting our analysis.
Disposable income = national income (GDP) + government transfer payments – taxes
Disposable income = national income (GDP) – net taxes
Net taxes = taxes – government transfer payments
Can be rearranged: National income = GDP = disposable income + net taxes

Question 25

Explain figure 9.3: The relationship between consumption and national income

Answer 25

Because national income differs from disposable income only by net taxes – which, for simplicity, we assume are constant – we can graph the consumption function using national income rather than disposable income. We can also calculate the MPC which is the slope of the consumption function, using either the change in national income or the change in disposable income and always get the same value. The slope of the consumption function between point A and point B is equal to the change in consumption divided by the change in national income.
Y-axis = real consumption spending (billions of dollars)
X-axis = real national income or real GDP (billions of dollars)
Consumption line = diagonal upward sloping line
Point A = middle of consumption line
Point B = higher up consumption line
Triangular space underneath points A and B = change in national income and change in consumption

Question 26

What is the relationship between income, consumption and saving?

Answer 26

Households either spend their income, save it or use it to pa taxes. For the economy, we can write the following:
National income = consumption + saving + net taxes
When national income increases, there must be some combination of an increase in consumption, an increase in saving or an increases in net taxes:
Change in national income = change in consumption + change in saving + change in net taxes
OR: ΔY = ΔC + ΔS + ΔT
To simplify we can assume that net taxes are always a constant amount (in which case ΔT = 0), so the following is also true: ΔY = ΔC + ΔS

Question 27

What is the marginal propensity to save (MPS)?

Answer 27

The proportion of the change in disposable income that is saved. It is measured as the change in saving divided by the change in disposable income.

Question 28

What is the relationship between MPC and the MPS?

Answer 28

The below equation tells us that when net taxes are constant, the sum of the MPC and the MPS must always equal 1/ they must add up to 1 because art of any increase in income is consumed, and whatever remains must be saved.
ΔY/ΔY = ΔC/ΔY + ΔS/ΔY
Or
1 = MPC + MPS

Question 29

What are the 4 most important variables that determine the level of investment?

Answer 29

1. Expectation of future profitability
2. The interest rate
3. Taxes
4. Cash flow

Question 30

Explain the following variable that determines the level of investment: expectations of future profitability

Answer 30

Investment goods such as factories, office buildings and machinery and equipment, are long lived. A firm is unlikely to build a new factory unless it is optimistic that the demand for its product will remain strong for a period of at least several years. Therefore, the optimism or pessimism of firms is an important determinant of investment spending.
When the economy moves into a period of economic contracts = many firms postpone buying investment goods, even if the demand for their own product is strong because they are afraid that the contraction or recession may become worse (and vice versa).

Question 31

Explain the following variable that determines the level of investment: the interest rate

Answer 31

A significant proportion of business investment is financed by borrowing, which takes the form of firms issuing corporate bonds or borrowing from banks or other financial institutions. Even firms that use part of their profits (retained earnings) for investment projects face an increased opportunity cost of using retained earnings if interest rates rise. Households also borrow to finance most of heir spending on new homes.
Therefore, holding constant the other factors that affect investment spending there is an inverse relationship between the real interest rate and investment spending: a higher real interest rate results in less investment spending, and a lower real interest rate results in more investment spending.

Question 32

Explain the following variable that determines the level of investment: taxes

Answer 32

Firms focus on the profits that remain after they have paid taxes. The federal government imposes a company income tax on the profits companies earn, including profits from new buildings, equipment and other investment goods they purchase.
A reduction in the company income tax rate would increase the after-tax profitability of investment spending. An increase in the company income tax rate would decrease the after-tax profitability of investment spending.
Investment tax incentives also increase investment spending. An investment tax incentive allows firms to deduct a portion of their expenditure on new investment goods from their annual profits, thereby lowering the amount of profit subject to taxation.

Question 33

Explain the following variable that determines the level of investment: cash flow

Answer 33

Cash flow is the difference between the cash revenues received by the firm and the cash spending by the firm. Many firms use their own funds to finance spending on new factories, machinery and equipment instead of borrowing. The more profitable a firm is, the greater its cash flow and the greater its ability to finance investment.
During periods of contraction or recession, many firms experience reduced profits, which in turn reduce their ability to finance spending on new factories or machinery and equipment.

Question 34

What do government purchases include?

Answer 34

Total government purchases include all spending by federal, state and local governments on goods and services. This includes purchases of consumption as well as investment goods such as infrastructure development (e.g. roads and railways).
Government purchases do not include transfer payments (such as social security payments or pensions payments) because the government doe not receive a good or service in return.

Question 35

What is the main source of government revenue to finance purchases?

Answer 35

Taxation receipts.

Question 36

How do we calculate net export?

Answer 36

Net exports equals the value of exports minus the value of imports. We can calculate net exports by taking the value of spending by foreign firms and households on goods and services produced in Australia and subtracting the value of spending by Australian firms and households on gods and services produced in other countries.

Question 37

What are the three most important variables that determine the level of net exports?

Answer 37

1. The price level in Australia relative to the price levels in other countries
2. The economic growth rate in Australia relative to the economic growth rates in other countries
3. The exchange rate between the Australian dollar and other currencies

Question 38

Explain the following variable that determines the level of net exports: The price level in Australia relative to the price levels in other countries

Answer 38

If the inflation rate in Australia is lower than the inflation rate in other countries, then prices of Australian goods and services increase more slowly than the prices of products of other countries.
This difference in price levels increases the demand for Australian goods and services relative to the demand for foreign products. So Australian exports increase and Australian imports decrease, which increases net exports.
The reverse will happen during periods when the inflation rate in Australia is higher than the inflation rates in other countries: Australian exports decrease and Australian imports increase, which decreases net exports.

Question 39

Explain the following variable that determines the level of net exports: The economic growth rate in Australia relative to the economic growth rates in other countries

Answer 39

As GDP increases in Australia, the incomes of households rise, leading them to increase their purchases of goods and services. Some of the additional goods and services purchased with rising incomes will be produced in Australia, but a proportion will also be imported.
When incomes rise faster in Australia than in other countries, Australian purchases of foreign goods and services increase faster than foreign purchases of Australian goods and services. As a result, net exports fall and vice versa.

Question 40

Explain the following variable that determines the level of net exports: The exchange rate between the Australian dollar and other currencies

Answer 40

The exchange rate is the value of one country’s currency in terms of another country’s currency. It influences the demand for imports and exports between countries.
As the value of the Australian dollar rises, the foreign currency price of many Australian products sold in other countries( such as hotel rooms, university places and manufactured goods) rises, and the dollar price of foreign goods sold in Australia falls.
When the value of the Australian dollar rises, prices received from primary products fall and export income falls. An increase in the value of he Australian dollar will reduce export income and increase imports, so net exports will fall. A decrease in the value of the Australian dollar will increase export income and reduce imports, so net exports will rise.

Question 41

What is the degree of responsiveness?

Answer 41

The amount by which there is a change in demand for exports and imports will depend on the degree of responsiveness of the quantity demanded and the quantity supplied to price changes (known as the price elasticities of demand and supply for the goods and services). This responsiveness largely depends on the availability of substitutes produced in other countries.

Question 42

How do you graph a macroeconomic equilibrium?

Answer 42

Use a 45-degree line diagram to illustrate it. All points of macroeconomic equilibrium must lie along he 45-degree line.
- Points on the line = the quantity produced equals the quantity sold.
- Points above the line = the quantity sold is greater than the quantity produced. Here planned economic expenditure will be greater than GDP.
- Points below the line = the quantity sold is less than the quantity produced. Here planned aggregate expenditure will less than GDP.
Y- axis = real aggregate expenditure, AE (billions of dollars)
X - axis = real national income or real GDP, Y (billions of dollars)
45-degree line = Y= AE

Question 43

What does the 45-degree line show?

Answer 43

It shows many potential points of macroeconomic. During any particular year, only one of these points will represent the actual level of equilibrium real GDP, given the actual level of planned real expenditure.

Question 44

How do we find the actual level of equilibrium real GDP?

Answer 44

To determine this point, we need to draw a line on the graph to show the aggregate expenditure function.

Question 45

What does the aggregate expenditure function show us?

Answer 45

It shows the amount of planned aggregate expenditure that will occur at every level of national income or GDP.

Question 46

Why does the consumption function not begin at zero?

Answer 46

Because a certain amount of consumption occurs that is independent of income, which is called autonomous consumption. If incomes increase and households increase their consumption spending, the increase in consumption spending is induced consumption.

Question 47

What is autonomous consumption?

Answer 47

Consumption that is independent of income. This is present because there would still be spending on necessities even if incomes were zero.

Question 48

What is induced consumption?

Answer 48

Consumption that is determined by the level of income.

Question 49

What are the quantities of I, G and NX for aggregate expenditure?

Answer 49

They are constant because we assume that the variables they depend on are constant. So the level of planned aggregate expenditure at any level of GDP is the amount of consumption spending at that level of GDP plus the sum of the constant amounts of planned investment, government purchases and net exports.

Question 50

When does macroeconomic equilibrium occur?

Answer 50

It occurs where the aggregate expenditure line (AE) crosses the 45-degree line.
The AE line is the C line + I line + G line + NX line.
C line = lowest upward sloping which represents the consumption function. Each other component is added to this line, which eventually takes it to a line representing aggregate expenditure.
Y=AE line === 45 degree line
AE line = upward (less then 45 degrees) diagonally sloped line which starts higher on y-axis and intersects with 45 degree line.

Question 51

What happens when there isn’t a macroeconomic equilibrium?

Answer 51

If GDP is less than equilibrium, the corresponding point on the AE line is above the 45-degree line.
- Planned AE is greater than total production, firms will experience an unplanned decrease in inventories and GDP will increase.
If GDP is greater than the equilibrium, the corresponding point on the AE line is below the 45-degree line.
- Planned AE is less than total production, firms will experience an unplanned increase in inventories and GDP will decrease.

Question 52

How do you show a recession on the 45-degree line?

Answer 52

When the aggregate expenditure line intersect with 45-degree line at a level of GDP below potential GDP, the economy is experiencing a contraction or recession.
Y – axis = real aggregate expenditure, AE (billions of dollars)
X – axis = real GDP, Y (billions of dollars)
Y (=AE) line = 45 degree line
AE line = upward (less then 45 degrees) diagonally sloped line which starts higher on y-axis and intersects with 45 degree line.
Equilibrium GDP = intersection between 45 degree line and AE line (it is below potential GDP)
Straight vertical line = Potential GDP
Gap between 45 degree line, AE line and potential GDP = shortfall in AE that results in recession

Question 53

What is the important role of inventories?

Answer 53

Whenever planned AE is less than real GDP, some firms will experience unplanned increases in inventories. If firms do not cut back their production promptly when pending declines, they will accumulate inventories. If firms accumulate excess inventories, then even if spending quickly returns to its normal levels, firms will have to sell their excess inventories before they can return to producing at normal levels.

Question 54

What is the multiplier effect?

Answer 54

The process by which an increases in autonomous expenditure leads to a larger increase in real GDP. The effect occurs because an initial increase in autonomous expenditure will se off a series of increases in real GDP.

Question 55

What is autonomous expenditure?

Answer 55

Expenditure that does not depend on the level of real GDP.

Question 56

What is induced expenditure?

Answer 56

Expenditure that depends on the level of real GDP.

Question 57

Explain the multiplier effect in figure 9.12.

Answer 57

Y (= AE) = 45-degree line
AE1 = upward (less than 45 degrees) diagonally sloped line which starts higher on y-axis and intersects with 45-degree line.
AE2 = upward diagonally sloped line (parallel to AE1, but higher)
Point A = intersection between AE1 and 45-degree line
Point B = intersection between AE2, 45-degree line and potential GDP (higher than point A)
Straight vertical line = potential GDP, moves from intersecting with Point A to intersecting with Point B
The movement from AE1 to AE2 represents an increases in a component of AE (such as investment spending), this then results in an increase in equilibrium GDP (which equals potential GDP). This initial increase in planned investment spending results in a big increase in equilibrium real GDP – this represents a multiplied effect.

Question 58

What is a multiplier?

Answer 58

The ratio of increase in equilibrium real GDP divided by the increase in autonomous expenditure.

Question 59

How can we calculate the value of the multiplier in the example on page 255?

Answer 59

By dividing the increase in equilibrium real GDP by the increase in autonomous expenditure:
ΔY/ΔI = change in real GDP/change in investment spending
e.g. $40 billion/$10 billion = 4
with a multiplier of 4, each increase in autonomous expenditure of $1 will result in a change in equilibrium GDP of $$.

Question 60

Explain the multiplier in reverse: the great depression.

Answer 60

A decrease in autonomous expenditure causes a decrease in real GDP. As AE declined, many firms experienced declining sales and began to lay off workers. Falling levels of production and income induced further declines in consumption spending, which lead to further cutbacks in production and employment (downward spiral).

Question 61

What is a general formula for the multiplier?

Answer 61

Multiplier = Change in equilibrium real GDP/change in autonomous expenditure = 1/(1-MPC)
What 4 points summarise the multiplier effect?
1. The multiplier effect occurs both when autonomous expenditure increases and when it decreases.
2. The multiplier effect makes the economic more sensitive to changes in autonomous expenditure than it would otherwise be. Because an initial decline in investment spending sets off a series of declines in production, income and spending, firms that are far removed from the industry where the fall investment occurred also experience sales declines.
3. The larger the MPC, the larger the value of the multiplier. This relationship between the value of the MPC and the value of the multiplier holds true because the larger the MPC, the more additional consumption takes place after each rise in income during the multiplier process.
4. The formula for the multiplier, 1/(1-MPC), is oversimplified because it ignores some real-world complications, such as the effect that an increasing GDP can have on imports, inflation and interest rates.

Question 62

What is the paradox of thrift?

Answer 62

We have seen that an increase in savings can increase the rate of economic growth in the long run by providing funds for investment (ch 5 and 6). But in the short run, if households save more of their income and spend less of it, AE and real GDP will decline, if we assume all else remains constant.
Keynes argued that if many households simultaneously decide to increase their saving and reduce their spending, they may make themselves worse off by causing AE to fall, thereby pushing the economy into a contraction or recession. The lower incomes during the contraction or recession might mean that total saving does not increase, despite the attempts by many individuals to increase their own saving (paradox of thrift).

Question 63

What is the effect of the paradox of thrift?

Answer 63

It appears to be something favourable to the long-run performance of the economy but might be counterproductive in the short run. However, many economists are sceptical of the reasoning of the paradox of thrift.

Question 64

Why are some economists sceptical of the paradox of thrift?

Answer 64

This is because an increase in saving, by increasing the supply of loanable funds, should lower the real interest rate and increase the level of investment spending. This increase in investment spending might offset some or all of the decline in consumption spending attributable to increase saving.

Question 65

Explain the aggregate demand curve.

Answer 65

When demand for a product increases, firms will usually respond by increasing productive, but they are also likely to increase production. Similarly, when demand falls then production falls, but often prices also fall.
AD is used to show the level of planned AE in the economy (it shows the relationship between the price level and the level of planned AE in the economy).
Increase price = Decrease AD = Decrease AE
Decreased price = increased AD = Increased AE

Question 66

What is the effect of the price level of on the components of AE?

Answer 66

Increases in price level will cause AE to fall and decreases in the price level will cause aggregate expenditure to rise.

Question 67

What the 3 main reasons for the inverse relationship between changes in the price level and changes in AE?

Answer 67

1. Rising price level decreases consumption by decreasing the real value of household wealth (a falling price level has the reverse effect).
2. If the price level in Australia rises relation to the price levels in other countries, Australian export income will fall in real terms making exports less attractive to produce, and foreign imports will become relatively less expensive, causing net exports to fall. A fall price level in Australia has the reverse effect.
3. When prices rise, firms and households need more funds to finance buying and selling and therefor they try to increase the amount of funds they hold by withdrawing funds from banks, borrowing from banks or selling financial assets.

Question 68

What happens if the central bank (RBA) does not allow an increase in the availability of funds?

Answer 68

The result will be an increase in nominal interest rates. If this increase in the nominal interest rate is greater than the increase in the price level, the real interest rate will rise.

Question 69

What is the aggregate demand curve?

Answer 69

A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms and the government.

Question 70

What is the effect of a higher price level of real GDP?

Answer 70

Y – axis = real aggregate expenditure, AE (billions of dollars)
X – axis = real GDP, Y (billions of dollars)
Y (=AE) line = 45-degree line
AE1 = upward (less than 45 degrees) diagonally sloped line which starts higher on y-axis and intersects with 45-degree line.
AE2 = upward diagonally sloped line (parallel to AE1, but lower)
An increase in price level is reflected in the shift from AE1 down to AE2. This moves the equilibrium to move down (to the left) the 45-degree line, reflecting a decrease in real GDP.

Question 71

What is the effect of a lower price level of real GDP?

Answer 71

Y – axis = real aggregate expenditure, AE (billions of dollars)
X – axis = real GDP, Y (billions of dollars)
Y (=AE) line = 45 degree line
AE1 = upward (less than 45 degrees) diagonally sloped line which starts higher on y-axis and intersects with 45-degree line.
AE2 = upward diagonally sloped line (parallel to AE1, but higher)
A decrease in price level is reflected in the shift from AE1 up to AE2. This moves the equilibrium to move up (to the right) the 45-degree line, reflecting an increase in real GDP.