Unit 5: Long-Run Consequences of Stabilization Policies

Budget Deficit

A flow variable representing the difference when government spending exceeds tax revenue in a single fiscal year.

Budget Surplus

Occurs when tax revenue exceeds government spending in a single fiscal year.

National Debt

A stock variable representing the total accumulation of past deficits minus past surpluses, the total amount the federal government owes.

Crowding Out

The phenomenon where government borrowing competes with private borrowers for available funds, potentially reducing private sector investment.

Real Interest Rate

The cost of borrowing money, adjusted for inflation, affected by shifts in the Loanable Funds Market.

Loanable Funds Market

The market where borrowers (including the government) compete with private sector borrowers for available funds.

Gross Private Investment (I_g)

The total spending by private businesses on physical capital like machinery and factories.

Capital Stock

The total accumulation of physical capital in the economy, essential for economic growth.

Economic Growth

A sustained increase in Real GDP per Capita over time, indicating improvements in standard of living.

Rule of 70

A formula to estimate the number of years for a variable to double; calculated as 70 divided by the Annual Growth Rate.

Production Possibilities Curve (PPC)

A graphical representation showing the maximum output possibilities for two goods, exhibiting trade-offs.

Aggregate Demand-Aggregate Supply Model (AD-AS Model)

A macroeconomic model that explains price levels and output through the interaction of aggregate demand and aggregate supply.

Diminishing Returns

A principle stating that increasing the amount of a single input while holding others constant will eventually yield lower rates of output increases.

Supply-Side Policies

Government policies aimed at enhancing the economy's productive capacity through investment in physical and human capital, technology, and institutions.

Investment Tax Credits

Tax reductions offered to businesses that invest in new capital, incentivizing physical capital formation.

Education & Training

Public policies aimed at increasing the skill level of the workforce through subsidies for education and vocational training.

Research & Development (R&D) Grants

Government funding or tax incentives provided for scientific research and innovation.

Property Rights

Legal rights that give individuals or firms control over their resource use, promoting investment and innovation.

Positive Externalities

Benefits to a third party resulting from an economic transaction, often associated with infrastructure investments.

Aggregate Production Function

A function that illustrates the relationship between inputs (like capital and labor) and output (like GDP).

Interest Rates

The cost of borrowing money, which is impacted by government borrowing in the Loanable Funds Market.

Nominal vs. Real GDP

Nominal GDP measures all final goods and services at current market prices, while Real GDP adjusts for inflation.

Economic Recovery

The process of returning to full employment from a recession, distinct from economic growth which requires shifts in production capacity.

Physical Capital

Tangible assets such as machinery, tools, and buildings required for the production of goods and services.

Human Capital

The skills, knowledge, and experience possessed by individuals, contributing to economic productivity.

Technological Advancement

Improvements in technology that enhance production efficiency and output, shifting the Aggregate Production Function upward.