Glossary
Aggregate Demand (AD)
The total demand for all goods and services produced in an economy at a given price level and in a given time period.
Example:
A significant increase in consumer confidence and spending would cause the Aggregate Demand curve to shift to the right.
Contractionary Fiscal Policy
Government actions to slow down an overheating economy, typically by decreasing spending or increasing taxes, used during periods of high inflation.
Example:
If inflation is soaring, the government might use Contractionary Fiscal Policy by raising taxes to reduce the amount of money people have to spend.
Discretionary Fiscal Policy
Deliberate changes in government spending or taxation enacted by legislative action to influence the economy.
Example:
The passage of a new law authorizing stimulus checks to citizens is an example of Discretionary Fiscal Policy.
Expansionary Fiscal Policy
Government actions to stimulate the economy, typically by increasing spending or decreasing taxes, used during recessions.
Example:
To combat high unemployment, a government might enact Expansionary Fiscal Policy by funding new public works projects.
Fiscal Policy
The government's use of spending and taxation to influence the economy.
Example:
During the 2008 financial crisis, the U.S. government implemented a large stimulus package, a form of Fiscal Policy, to boost economic activity.
Government Spending
Direct purchases of goods and services by the government, such as infrastructure projects or defense equipment.
Example:
When the government funds the construction of a new highway, that's an example of increased Government Spending aimed at stimulating the economy.
Inflationary Gap
A situation where the economy's actual output is above its potential output, leading to upward pressure on prices.
Example:
When consumer demand is so strong that businesses can't keep up, leading to rapidly rising prices, the economy is in an Inflationary Gap.
Marginal Propensity to Consume (MPC)
The fraction of any change in disposable income that a household spends on consumption.
Example:
If a person receives an extra 80 of it, their Marginal Propensity to Consume is 0.8.
Marginal Propensity to Save (MPS)
The fraction of any change in disposable income that a household saves.
Example:
If a person receives an extra 20 of it, their Marginal Propensity to Save is 0.2.
Non-Discretionary Fiscal Policy (Automatic Stabilizers)
Built-in features of the economy that automatically adjust government spending or taxation to stabilize the economy without new legislation.
Example:
During a recession, unemployment benefits automatically increase, acting as a Non-Discretionary Fiscal Policy to support incomes.
Recessionary Gap
A situation where the economy's actual output is below its potential output, leading to high unemployment.
Example:
If a country's factories are operating at only 70% capacity and many workers are jobless, it's likely experiencing a Recessionary Gap.
Spending Multiplier
The ratio of the change in real GDP to the initial change in government spending, indicating how much total spending increases for each dollar of government spending.
Example:
If the Spending Multiplier is 2, a 20 billion.
Tax Multiplier
The ratio of the change in real GDP to the initial change in taxes, indicating how much total spending changes for each dollar change in taxes.
Example:
With a Tax Multiplier of 0.75, a 75 increase in overall economic activity, assuming some of the tax cut is saved.
Taxation
The process by which the government collects revenue from individuals and businesses.
Example:
If the government decides to lower income tax rates, it's adjusting its Taxation policy to potentially increase consumer spending.