Key Terms

contractionary fiscal policy: tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

coordination argument: downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants

disposable income: income after taxes

expansionary fiscal policy: tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession

expenditure multiplier: Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP

inflationary gap: equilibrium at a level of output above potential GDP

macroeconomic externality: occurs when what happens at the macro level is different from and inferior to what happens at the micro level; an example would be where upward sloping supply curves for firms become a flat aggregate supply curve, illustrating that the price level cannot fall to stimulate aggregate demand

menu costs: costs firms face in changing prices

Phillips curve: the tradeoff between unemployment and inflation

real GDP: the amount of goods and services actually sold in a nation

recessionary gap: equilibrium at a level of output below potential GDP

sticky wages and prices: a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand

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