Aggregate demand - The total demand for all goods and services in an economy at different price levels, represented by the sum of consumption, investment, government spending, and net exports (exports minus imports).
Disposable income - The amount of money households have left after paying taxes and receiving government transfers, which is available for spending or saving.
Marginal propensity to consume - The fraction of any additional income that a household will spend on consumption rather than saving. It's calculated as the change in consumption divided by the change in income.
Marginal propensity to save - The fraction of any additional income that a household will save rather than consume. It's calculated as the change in saving divided by the change in income. The sum of MPC and MPS equals 1.
Multiplier effect - The process by which an initial change in spending (either an increase or decrease) leads to a larger overall change in economic output due to increased consumption and production.
Spending multiplier - The ratio of change in real GDP (output) to an initial change in spending. A higher MPC leads to a higher spending multiplier, meaning that initial spending will result in a larger increase in GDP.
Tax multiplier - The ratio of the change in GDP resulting from an initial change in taxes. A tax cut increases disposable income, leading to an increase in consumption, whereas a tax increase reduces disposable income and consumption.
Short-run aggregate supply (SRAS) - The total quantity of goods and services that producers in an economy are willing and able to supply at different price levels in the short run, where some input prices (like wages) are sticky or fixed.
“Sticky” wages - The concept that wages are slow to adjust to changes in market conditions, meaning they may remain constant even when economic conditions change.
Long-run aggregate supply (LRAS) - The total quantity of goods and services that an economy can produce when all resources are fully employed, and the economy is operating at its potential output level, regardless of the price level.
Full employment - A situation in which all available labor resources are being used in the most efficient way possible, with no cyclical unemployment. It occurs when the economy is at its natural rate of unemployment.
Demand-pull inflation - Inflation that occurs when aggregate demand in the economy outpaces aggregate supply, leading to higher prices as demand increases faster than the economy can produce goods and services.
Cost-push inflation - Inflation that results from an increase in the cost of production, such as higher wages or raw material costs, leading businesses to raise prices in order to maintain profit margins.
Expansionary policy - A type of fiscal or monetary policy aimed at stimulating economic activity. Examples include increasing government spending, cutting taxes, or lowering interest rates, which boosts aggregate demand and economic growth.
Contractionary policy - A type of fiscal or monetary policy aimed at reducing inflation or slowing down an overheated economy by decreasing government spending, raising taxes, or increasing interest rates, which reduces aggregate demand.
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