consumption function  the positive relationship between consumption and income.
expenditure line  the relation between the sum of the four components of spending and aggregate income.
flexible price assumption  an assumption that prices adjust instantaneously in response to a change in supply or demand.
45-degree line  the line showing that expenditure equals aggregate income.
marginal propensity to consume (MPC)  the slope of the consumption function, showing the change in consumption that is due to a given change in income.
potential GDP  the economy’s long-term growth trend for real GDP determined by the available supply of capital, labor, and technology. Real GDP fluctuates above and below potential GDP.
real business cycle theory  a theory of macroeconomics that stresses that shifts in potential GDP are a primary cause of fluctuations in real GDP; the shifts in potential GDP are usually assumed to be caused by changes in technology.
spending balance  the level of income or real GDP at which the 45-degree line and the expenditure line cross; also called equilibrium income.
sticky price assumption  an assumption that prices do not move quickly in response to a change in supply or demand; the assumption is used in the theory of economic fluctuations.