Week 1: What Is Keynesian Economics? (glossary)

Aggregate Demand

The total demand for goods and services in an economy, measured as the sum of consumption, investment, government spending, and net exports.

Fiscal Policy

Government decisions on taxation and spending aimed at influencing economic activity.

Business Cycle

The fluctuation of economic activity over time, including periods of expansion (booms) and contraction (recessions).

Multiplier Effect

The proportional change in output resulting from an initial change in spending; if the multiplier is greater than one, total output increases by more than the initial spending.

M = 1/ (1-MPC)

where

M is the economic multiplier

MPC is the marginal propensity to consume

Deficit Spending

When a government spends more than it collects in revenue, often used during downturns to stimulate the economy.

Liquidity Trap

A situation where monetary policy becomes ineffective because interest rates are near zero and savings rates remain high, so increased money supply does not stimulate demand.

Stagflation

A combination of stagnant economic growth and high inflation, which traditional Keynesian tools struggle to address.

Long-Run Neutrality of Money

The idea that changes in the money supply only affect nominal variables (like prices) and not real variables (like output) in the long run.

Mixed Economy

An economy where both the private sector and government play roles in production and resource allocation.

Market Failure

A situation where the market does not allocate resources efficiently on its own, often justifying government intervention.