The Keynesian 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

what occurs at the macro level is different from the sum of what happens at the micro level; an example would be where upward-sloping market supply curves become a flat aggregate supply curve

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 being 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

The Neoclassical Perspective

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