Aggregate Expenditures Model and Fiscal Policy

Vocabulary flashcards covering key terms and definitions related to the Aggregate Expenditures Model, Fiscal Policy, and Monetary Policy.

Aggregate Expenditures Model

Developed by John Maynard Keynes during the Great Depression to address issues of macroeconomic instability.

Recessionary Expenditure Gap

Occurs when aggregate spending is too low, below full-employment GDP.

Inflationary Expenditure Gap

Occurs when aggregate spending exceeds full-employment GDP, leading to demand-pull inflation.

Fiscal Policy

Government's use of spending and taxation to influence the economy.

Expansionary Fiscal Policy

Used during recessions to increase government spending or decrease taxes to achieve full employment.

Contractionary Fiscal Policy

Used during demand-pull inflation to reduce spending or increase taxes.

Automatic Stabilizers

Economic policies and programs that counteract fluctuations in a nation's economic activity without direct intervention.

M1 Money Supply

The narrowest definition of money, including currency in circulation and checkable deposits.

M2 Money Supply

A broader definition of money, including M1 plus savings deposits and other near-monies.

Legal Tender

Currency that must be accepted if offered in payment of a debt.

Central Bank

A national bank that provides financial and banking services for its country's government and commercial banking system.

Monetary Policy

The process by which the central bank manages the money supply to achieve specific goals.

Required Reserve Ratio

The fraction of deposits that a bank must hold as reserves.

Expansionary Monetary Policy

A form of monetary policy that aims to increase the money supply to stimulate economic activity.

Restrictive Monetary Policy

A form of monetary policy aimed at reducing the money supply to curb inflation.

Aggregate Demand and Aggregate Supply Model (AD-AS Model)

A macroeconomic model explaining price levels and the total output in an economy.

Multiplier Effect

The proportional amount of increase in final income that results from an injection of spending.

Interest Rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

Costs Push Inflation

Inflation caused by an increase in the prices of inputs which leads to decreased supply.

Tariffs

Taxes imposed on imported goods which can affect trade balance and domestic production.

Devaluation

The reduction of the value of a currency with respect to other currencies, aimed at increasing exports.