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
