chapter 12 the keynesian perspective/chapter 13 the neoclassical perspective

Contractionary fiscal policy

Tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures.

Coordination argument

Downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants.

Disposable income

Income after taxes.

Expansionary fiscal policy

Tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession.

Expenditure multiplier

Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP.

Inflationary gap

Equilibrium at a level of output above potential GDP.

Macroeconomic externality

Occurs when what happens at the macro level is different from and inferior to what happens at the micro level.

Menu costs

Costs firms face in changing prices.

Phillips curve

The tradeoff between unemployment and inflation.

Real GDP

The amount of goods and services actually sold in a nation.

Recessionary gap

Equilibrium at a level of output below potential GDP.

Sticky wages and prices

A situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand.

adaptive expectations

the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change

expected inflation

a future rate of inflation that consumers and firms build into current decision making

neoclassical perspective

the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output

physical capital per person

the amount and kind of machinery and equipment available to help a person produce a good or service

rational expectations

the theory that people form the most accurate possible expectations about the future that they can, using all information available to them