Glossary: Keynesian and Neoclassical Economics

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