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Dynamic AD-AS Model: Fiscal Policy definitions

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  • Dynamic ADAS Model
    A framework where aggregate supply and demand curves shift rightward annually, reflecting ongoing economic growth.
  • Long Run Aggregate Supply
    A curve representing the economy's maximum sustainable output, increasing each year in the dynamic model.
  • Short Run Aggregate Supply
    A curve showing total production at current prices, shifting rightward over time due to economic growth.
  • Aggregate Demand
    A curve reflecting total spending on goods and services, influenced by government actions and shifting annually.
  • Expansionary Fiscal Policy
    A government approach involving increased spending or tax cuts to boost aggregate demand during a recession.
  • Contractionary Fiscal Policy
    A government strategy using reduced spending or higher taxes to decrease aggregate demand and control inflation.
  • Potential GDP
    The level of output an economy can achieve when operating at full capacity, serving as a target for equilibrium.
  • Long Run Equilibrium
    A state where aggregate demand, short run, and long run aggregate supply intersect, indicating economic stability.
  • Short Run Equilibrium
    A temporary point where aggregate demand and short run aggregate supply meet, possibly away from potential GDP.
  • Government Spending
    Expenditures by the public sector, directly affecting aggregate demand and used as a fiscal policy tool.
  • Taxation
    A fiscal lever involving adjustments to taxes, impacting consumption and aggregate demand.
  • Recession
    A period when real GDP falls below potential, prompting policies to stimulate aggregate demand.
  • Inflation
    A situation with rising price levels, often resulting from aggregate demand exceeding potential GDP.
  • Price Level
    An index reflecting the average prices of goods and services, used to track inflation or deflation.