Unit 5: Long-Run Consequences of Stabilization Policies

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Fiscal Policy

Changes in government spending or taxation conducted by the legislative branch.

Monetary Policy

Changes in the money supply and interest rates conducted by the Central Bank.

Expansionary Policy

Policy that increases government spending or decreases taxes to boost economic activity.

Contractionary Policy

Policy that decreases government spending or increases taxes to slow down economic activity.

Crowding Out Effect

When government spending leads to a reduction in private sector investment due to higher interest rates.

Real GDP (Y)

The total value of all goods and services produced in an economy, adjusted for inflation.

Price Level (PL)

A measure of the average level of prices in the economy.

Unemployment

The percentage of the labor force that is jobless and actively looking for work.

Short-Run Phillips Curve (SRPC)

Illustrates the inverse relationship between the inflation rate and unemployment rate.

Long-Run Phillips Curve (LRPC)

A vertical line indicating that there is no trade-off between inflation and unemployment in the long run.

Natural Rate of Unemployment (NRU)

The level of unemployment consistent with a stable rate of inflation.

Movement Along the SRPC

Changes in the unemployment rate and inflation rate due to shifts in Aggregate Demand.

Shift of the SRPC

Changes in the SRPC due to shifts in Short-Run Aggregate Supply or inflation expectations.

Quantity Theory of Money

The theory that links money supply to price level and economic output.

Monetary Neutrality

The principle that changes in the money supply have no effect on real variables in the long run.

Fisher Effect

The concept that an increase in inflation leads to a rise in the nominal interest rate, leaving the real interest rate unchanged.

Nominal Variables

Variables measured in monetary units, such as nominal GDP and nominal wages.

Real Variables

Variables that are adjusted for inflation, such as real GDP and real interest rates.

Supply Shock

An unexpected event that causes the supply curve to shift, impacting prices and output.

Velocity of Money (V)

The average number of times a dollar is spent to purchase goods and services in a year.

Budget Deficit

When government expenditures exceed revenue, leading to borrowing.

Loanable Funds Market

The market where borrowers and lenders come together to negotiate the terms of loans.

Nominal Interest Rate

The stated interest rate on a loan, not adjusted for inflation.

Real Interest Rate

The nominal interest rate adjusted for inflation.

Crowding Out

The reduction in private investment as a result of increased government borrowing.

Aggregate Supply (AS)

The total supply of goods and services that firms in an economy plan to sell during a specific time period.