Glossary
Aggregate Demand (AD)
The total quantity of all goods and services demanded in an economy at various price levels, representing the sum of consumption, investment, government spending, and net exports.
Example:
A sudden increase in consumer confidence and spending across the nation would cause the Aggregate Demand curve to shift to the right.
Crowding Out
A phenomenon where increased government borrowing to finance expansionary fiscal policy leads to higher interest rates, which then reduces private investment.
Example:
When the government issues a large amount of bonds to fund a new national park, it might cause crowding out by making it more expensive for a local business to get a loan for expansion.
Economic Growth
An increase in the production of goods and services over time, typically measured by the percentage increase in real GDP, leading to a higher standard of living.
Example:
Innovations in renewable energy technology could drive significant economic growth by creating new industries and jobs.
Expansionary Fiscal Policy
Government actions, such as increasing spending or decreasing taxes, designed to stimulate economic activity and shift the Aggregate Demand curve to the right.
Example:
During a recession, a government might implement expansionary fiscal policy by launching a large infrastructure project to create jobs and boost demand.
Fiscal Policy
The use of government spending and taxation to influence the economy, aiming to stabilize it or promote macroeconomic goals like full employment and price stability.
Example:
When the government decides to cut taxes for small businesses, it's implementing a form of fiscal policy to encourage investment and job creation.
Infrastructure
The fundamental facilities and systems serving a country, city, or area, such as transportation, communication, power, and water systems.
Example:
Investing in modernizing a nation's infrastructure, like high-speed rail and broadband internet, can significantly boost productivity and connectivity.
Interest Rates
The cost of borrowing money or the return on saving money, which is influenced by the supply and demand for loanable funds.
Example:
If interest rates on mortgages rise, fewer people might be able to afford new homes, impacting the housing market.
Loanable Funds Market
A conceptual market where the supply of funds comes from savers and the demand for funds comes from borrowers, determining the real interest rate.
Example:
When a company decides to issue new bonds to finance a factory, they are demanding funds in the loanable funds market, competing with other borrowers like the government.
Monetary Policy
Actions undertaken by a central bank to influence the availability and cost of money and credit, typically to achieve macroeconomic objectives like inflation control and full employment.
Example:
The Federal Reserve's decision to lower the federal funds rate is an example of monetary policy designed to make borrowing cheaper and stimulate economic activity.
Private Investment
Spending by businesses on new capital goods (like machinery or buildings) and by households on new housing, crucial for long-term economic growth.
Example:
A tech company building a new data center is an example of private investment, signaling confidence in future economic prospects.
Recessionary Gap
A situation in an economy where the actual output (Real GDP) is below its potential output (full employment), indicating underutilized resources and high unemployment.
Example:
If a country's factories are operating at only 60% capacity and many workers are unemployed, it's likely experiencing a recessionary gap.