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12.26: Glossary: Keynesian and Neoclassical Economics

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    The Keynesian Perspective

    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
    what occurs at the macro level is different from the sum of what happens at the micro level; an example would be where upward-sloping market supply curves become a flat aggregate supply curve
    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 being 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

    The Neoclassical Perspective

    adaptive expectations
    the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change
    expected inflation
    a future rate of inflation that consumers and firms build into current decision making
    neoclassical perspective
    the philosophy that, in the long run, the business cycle will fluctuate around the potential, or full-employment, level of output
    physical capital per person
    the amount and kind of machinery and equipment available to help a person produce a good or service
    rational expectations
    the theory that people form the most accurate possible expectations about the future that they can, using all information available to them
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