Key Terms

Please review the following key terms. (20)(21)(22)(23)

Aggregate demand (AD) — curve the relationship between the total spending on domestic goods and services and the price level for output

Aggregate demand/aggregate supply (AD/AS) model — a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level

Aggregate supply (AS) — curve the relationship between real GDP and the price level for output, holding the price of inputs fixed

Aggregate supply (AS) — the relationship between real GDP and the price level for output, holding the price of inputs fixed

Balanced budget — when government spending and taxes are equal

Budget deficit — when the federal government spends more money than it receives in taxes in a given year

Budget surplus — when the government receives more money in taxes than it spends in a year

Contractionary fiscal policy — fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

Expansionary fiscal policy — fiscal policy that increases the level of aggregate demand, either through cuts in government spending or increases in taxes

Full-employment GDP — another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment

Keynes’ law — “demand creates its own supply”

Legislative lag — the time it takes to get a fiscal policy bill passed

National debt — the total accumulated amount the government has borrowed, over time, and not yet paid back

Neoclassical economists — who generally emphasize the importance of aggregate supply in determining the size of the macro economy over the long run

Potential GDP — the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions

Say’s law — “supply creates its own demand”

Stagflation — an economy experiences stagnant growth and high inflation at the same time