KEY TERMS

aggregate expenditure function

an equation showing how all four components of spending within the economy vary with national income

aggregate expenditure line an upward sloping line that depicts the aggregate expenditure function

autonomous consumption the amount consumers spend if their income was zero; i.e. consumer spending which is caused by something other than income, for example, borrowing

consumption function an equation showing how an individuals consumer spending varies with disposable income

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

marginal propensity to consume (MPC)  the share of the additional dollar of income a person decides to devote to consumption expenditures.  MPC = ΔC/ΔY

marginal propensity to save (MPS)  the share of the additional dollar a person decides to save.  MPS = ΔS/ΔY

menu costs

costs firms face in changing prices

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