| Term | Definition |
|---|
| Recession | A period when there is a mild fall in income, and output, and a mild rise in unemployment. |
| Depression | It is a period of severe fall in output and income, and a severe rise in unemployment. |
| Model of Aggregate Demand and Aggregate Supply | It is a model used by most economists to explain short run fluctuations in economic activity along its long run trend. |
| Aggregate Demand Curve | A representation of the willingness and ability of households, firms, government agencies, and rest of the world to purchase quantities of goods and services at different price levels. |
| Aggregate Supply Curve | A representation of the willingness and abilities of firms to produce and sell quantities of goods and services at different price levels. |
| Natural Rate of Output | The level of output that will be produced when the economy is at full employment. |
| Crowding Out Effect | The offset in AD that results when expansionary fiscal policy raises the interest rates, and thereby reduces investment spending. |
| Automatic Stabilizers | The changes in fiscal policy that stimulate AD when the economy goes into a recession without policymakers having to take any deliberate action. |
| The Theory of Liquidity Preference | Keynesian theory that the interest rates adjusts itself to bring the supply of money and the demand of money into balance. |
| Stagflation | The period when output if falling and prices are rising. |
| Fiscal Policy | The setting of the level of government spending and taxation by government policymakers. |
| Business Cycle | Up and Down movement of real GDP over time. |
| Multiplier Effect | The additional shift in the AD that results when expansionary fiscal policy increases income and thereby increases consumer spending. |
| Total Effect of /\ G on /\ AD | /\G/(1-MPC) |
| MPC | Marginal Propensity to Consume |
| MPS | Marginal Propensity to Save |
| Total Effect of /\ T on /\ AD | {(-MPC)*/\ T}/{1-MPC} |
| Phillips Curve | The curve that shows the short run tradeoff between inflation and unemployment. |
| Natural Rate Hypothesis | The claim that unemployment returns to its natural rate regardless of the rate of inflation. |
| Supply Shock | An event that directly alters firm's cost and prices, shifting the economy's AS curve and thus the Phillips Curve. |
| Sacrifice Ratio | The number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point. |
| Rational Expectations Theory | The theory according to which people optimally use all the information they have including information about government policies when forecasting the economic future. |
Combine with other sets
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