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Actual investment spending – The sum of planned investment spending and unplanned inventory investment.

Aggregate demand (AD) – The total demand for goods and services in the economy at different price levels.

Aggregate supply (AS) – The total supply of goods and services firms in an economy plan to sell at different price levels.

Automatic stabilizers – Government spending and taxes that automatically adjust with the business cycle (e.g., unemployment insurance, progressive taxes).

Balanced-budget multiplier – The idea that equal increases in government spending and taxes lead to a net increase in aggregate demand equal to the change in spending.

Budget deficit – When government spending exceeds government revenue in a given year.

Budget surplus – When government revenue exceeds government spending in a given year.

Consumption function – The relationship between household consumption spending and disposable income.

Contractionary fiscal policy – Policy that reduces aggregate demand through decreased government spending or increased taxes.

Cost-push inflation – Inflation caused by a decrease in aggregate supply (e.g., rising input costs).

Crowding out effect – The reduction in private investment caused by government borrowing, which raises interest rates.

Demand shock – A sudden event that shifts the aggregate demand curve (positive or negative).

Demand-pull inflation – Inflation caused by an increase in aggregate demand.

Discretionary fiscal policy – Deliberate actions by policymakers to influence aggregate demand through spending or tax changes.

Equilibrium – The point where aggregate demand equals aggregate supply.

Expansionary fiscal policy – Policy that increases aggregate demand through higher government spending or tax cuts.

Fiscal policy – The use of government spending and taxation to influence the economy.

Inflationary gap – When actual output exceeds potential output (causing upward pressure on prices).

Interest rate effect – A higher price level reduces the purchasing power of money, increasing interest rates and reducing investment/consumption.

Loanable funds market (Mod 29) – The market that determines the real interest rate through the supply and demand for funds.

Long run aggregate supply (LRAS) – Aggregate supply when all prices and wages are flexible; represents potential output.

Long run – A period in which all prices, including wages, are flexible.

Marginal propensity to consume (MPC) – The fraction of additional income that is spent on consumption.

Marginal propensity to save (MPS) – The fraction of additional income that is saved.

Output gap – The difference between actual output and potential output.

Planned investment spending – The investment businesses intend to make, not including changes in inventories.

Potential output/GDP – The level of real GDP the economy can produce at full employment.

Recessionary gap – When actual output is below potential output (causing unemployment).

Self-correcting – The process where the economy returns to potential output without government intervention in the long run.

Short run aggregate supply (SRAS) – Aggregate supply when some prices and wages are sticky.

Short run – A period in which some prices or wages are fixed or inflexible.

Social insurance – Government programs that provide protection against economic hardship (e.g., Social Security, Medicare).

Spending multiplier – The factor by which a change in autonomous spending leads to a larger change in GDP.

Stabilization policy – Government policies intended to reduce the severity of recessions or curb inflation.

Stagflation – A combination of stagnation (low growth/high unemployment) and inflation.

Sticky wages – Wages that are slow to adjust downward in response to economic conditions.

Supply shock – A sudden event that shifts the aggregate supply curve (positive or negative).

Tax multiplier (transfer multiplier) – The factor by which a change in taxes or transfers changes aggregate demand, equal to –MPC/MPS.

Wealth effect – A higher price level reduces the real value of wealth, decreasing consumption.