Unit 5 Vocabulary - Long Run Consequences of Stabilization Policy

Economic Growth

An increase in a society's ability to meet the needs and wants of citizens utilizing the scarce factors of production available.

Capital Deepening

A situation where the capital per worker is increasing in the economy, leading to an increase in the capital intensity.

Capital Flight

The rapid outflow of assets or money from a country, usually due to economic consequences or economic globalization.

Externality

A cost or benefit from production or consumption that affects someone other than the immediate buyers and sellers of the product.

Public Goods

Goods or services characterized by nonrivalry and non-excludability, often produced by governments and paid for with tax revenues.

Private Goods

Goods or services that are individually consumed and can be profitably produced by privately owned firms.

Stagflation

The simultaneous increase in the rate of unemployment and the rate of inflation, caused by a leftward shift of the SRAS curve.

Crowding-Out

When federal spending increases, the demand for loanable funds increases, leading to higher interest rates and a decline in business investment.

Automatic Fiscal Policy

Fiscal policy actions that do not require a new act of congress to take effect, such as progressive income taxes or unemployment insurance.

Discretionary Fiscal Policy

Fiscal policy actions that require a new act of congress to take effect, such as passing a new bill to cut corporate taxes during a recession.

Budget Deficit

When federal spending exceeds tax revenue, resulting in the accumulation of national debt.

Budget Surplus

When federal spending is less than tax revenue, providing extra money that can be used to pay down existing national debt.

Balanced Budget

When federal spending is exactly equal to tax revenue, a rare occurrence that can be disrupted by automatic fiscal policy actions.

Non-Accelerating Inflation Rate of Unemployment (NAIRU)

The unemployment rate where the inflation rate is stable, equal to the natural rate of unemployment.

Short-Run Phillips Curve

A downward sloping curve illustrating the inverse relationship between unemployment and inflation in the short run.

Long-Run Phillips Curve

A perfectly inelastic curve at the NAIRU, showing no trade-off between unemployment and inflation in the long run.

Theory of Rational Expectations

The idea that people make choices based on rational outlook, available information, and past experiences, affecting their expectations of the future state of the economy.

Counter-Cyclical Policy

The use of monetary and fiscal policy tools to boost economic performance or reduce the rate of inflation in the short run.