Unit 5: Long-Run Consequences of Stabilization Policies 💷

Fiscal Policy

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

Recessionary Gap

A situation where real GDP is lower than potential GDP, indicating unused economic resources.

Inflationary Gap

A situation in which real GDP exceeds potential GDP, leading to upward pressure on prices.

Aggregate Demand (AD)

The total demand for goods and services in the economy at a given overall price level and in a given time period.

Short-Run Aggregate Supply (SRAS)

The total output of goods and services that firms will produce in the short run.

Liquidity Trap

A situation in which monetary policy becomes ineffective because interest rates are already near zero.

Phillips Curve

A graphical representation showing the inverse relationship between inflation and unemployment.

Demand-Pull Inflation

Inflation that occurs when demand for goods and services exceeds supply.

Cost-Push Inflation

Inflation that results from a decrease in the supply of goods and services, leading to increased prices.

Crowding Out Effect

A situation where increased government spending leads to a reduction in private sector spending.

Budget Surplus

The condition when government revenues exceed expenditures.

Budget Deficit

The situation where government expenditures exceed revenues.

National Debt

The total amount of money that a country's government has borrowed and not yet repaid.

Long-Run Equilibrium

A situation in which all factors of production are used efficiently and the economy is at full employment.

Natural Rate of Unemployment

The level of unemployment that occurs when the economy is producing at its potential output.

Real GDP

Gross Domestic Product adjusted for inflation.

Nominal GDP

The total value of all goods and services produced in a country without adjusting for inflation.

Budgetary Policy

Government policies regarding its budget, including spending and taxation.

Expansionary Fiscal Policy

Fiscal policy that involves increasing government spending and/or decreasing taxes to stimulate the economy.

Contractionary Fiscal Policy

Fiscal policy that involves decreasing government spending and/or increasing taxes to slow economic activity.

Supply-Side Policy

Economic policies that encourage the production of goods and services by reducing taxes and regulatory burdens.

Discretionary Fiscal Policy

Deliberate changes to government spending or taxation in response to economic conditions.

Automatic Stabilizers

Economic policies and programs that automatically help stabilize an economy.

Velocity of Money

The rate at which money is exchanged in an economy.

Potential GDP

The maximum possible output an economy can produce without leading to inflation.

Inflation Targeting

A monetary policy where the central bank sets an explicit target inflation rate.

Monetary Policy

The process by which the central bank manages money supply and interest rates.

Interest Rate

The proportion of a loan that is charged as interest to the borrower.

Investment Tax Credit

A tax incentive that allows businesses to deduct a specified percentage of their capital investment from their taxes.

Economic Growth

An increase in the production of goods and services over a certain period.

Purchasing Power

The financial ability to buy products and services.

Equilibrium Price

The price at which the quantity of goods supplied equals the quantity of goods demanded.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.

Long-Run Aggregate Supply (LRAS)

The total amount of goods and services that an economy can produce when both capital and labor are fully employed.

Stagflation

A situation of slow economic growth and relatively high unemployment accompanied by inflation.

Disposable Income

The amount of money that households have available for spending and saving after income taxes.

Public Debt

The total amount of money that a government owes to creditors.

Inflation Rate

The percentage increase in the price level of goods and services over a specific period.

Real Interest Rate

The interest rate adjusted for inflation.

Nominal Interest Rate

The stated interest rate before adjustments for inflation.

Aggregate Demand Curve Shift

A graphical representation of the change in total demand for goods and services in the economy.

Short-Run Effects of Fiscal Policy

The impact of government actions to change spending or taxation on economic output in the short run.

Long-Run Impact of Fiscal Policy

The eventual effects of government fiscal measures on an economy over time.

Inflationary Spiral

A situation in which rising prices lead to increased wages, causing further inflation.

Output Gap

The difference between actual output and potential output in an economy.

Labor Force Participation Rate

The percentage of the working-age population that is part of the labor force.

Capacity Utilization

The extent to which an organization utilizes its installed productive capacity.

Fiscal Stimulus

Increased government spending or decreased taxes to stimulate the economy.

Monetary Stimulus

Policy measures by the central bank to increase the money supply and lower interest rates.

Structural Unemployment

Long-term unemployment caused by structural changes in the economy.

Cyclical Unemployment

Unemployment resulting from economic downturns, such as recessions.

Frictional Unemployment

Short-term unemployment that occurs when people are between jobs.

Nominal Wage

The amount of money a worker is paid in current dollars without adjustment for inflation.

Real Wage

The amount of money a worker is paid adjusted for inflation.

Consumer Price Index (CPI)

A measure that examines the average change over time in the prices paid by consumers for goods and services.

Producer Price Index (PPI)

A measure of the average changes in prices received by domestic producers for their output.

Disinflation

A reduction in the rate of inflation.

Hyperinflation

An extremely high and typically accelerating rate of inflation.

Deflation

A decrease in the general price level of goods and services.

Economic Expansion

A phase of the business cycle characterized by increasing economic activity and production.

Economic Contraction

A phase of the business cycle characterized by declining economic activity and production.

Trade Deficit

A situation where a country's imports exceed its exports.

Trade Surplus

A situation where a country's exports exceed its imports.

Tax Revenue

The income that is gained by governments through taxation.

Capital Gains Tax

A tax on the profit from the sale of property or an investment.

Fiscal Year

A one-year period that governments and businesses use for financial reporting and budgeting.

Debt Ceiling

The maximum amount of money that a government is allowed to borrow.

Public Good

A commodity or service that is made available to all members of society.

Merit Good

A good that is undervalued by the market and for which the government may provide for or subsidize.

Externality

A side effect or consequence of an activity that affects other parties without being reflected in costs.

Marginal Tax Rate

The rate at which the last dollar of income is taxed.

Income Inequality

The unequal distribution of income and opportunity between different groups in society.

Capital Accumulation

The growth of capital resources, including physical and human capital.

Human Capital

The skills, knowledge, and experience possessed by an individual regarded in terms of their value to an organization or economy.

Natural Resources

Raw materials supplied by nature that can be used for goods and services.

Investment in Technology

Redirecting resources to improve technological knowledge and advancements.

Quantitative Easing

A monetary policy where a central bank buys government securities to increase the money supply and lower interest rates.

Tight Monetary Policy

A policy that aims to restrict the money supply to curb inflation.

Easy Monetary Policy

A policy that aims to increase the money supply to stimulate the economy.

Budget Planning

The process of preparing a budget to manage income and expenses.

Equity Financing

The method of raising capital by selling company stock to investors.

Debt Financing

Borrowing money to be paid back later, usually with interest.

Sustainable Economic Growth

Economic growth that occurs without creating significant environmental harm.

Social Safety Net

Public policies designed to provide financial support to individuals in need.

Regulatory Policy

Government regulations that influence the economy, businesses, and consumers.