According to Exhibit 236 line abd shows the path of potentia

According to Exhibit 23-6, line abd shows the path of potential GDP. In Year 2, suppose the expenditure line intersects the 45-degree line at the level of spending corresponding to point b. If, in Year 3, the economy is at point c, then

the expenditure line has shifted up the 45-degree line to a point where real GDP equals potential GDP in Year 3

Solution

If we are currently in year 2 and are at a position of b, we expect the potential GDP to follow its path and will be d next year. Now that we are at c in year 3, it implies that real GDP is greater than potential GDP but the new level of spending is higher than what it would have been at d. Hence we do have AE = Y but the 45 degree line has been shifted up by the AE curve.

The correct option is the expenditure line has shifted up the 45-degree line more than it would have if real GDP equaled potential GDP in Year 3.