Unit 5: Long-Run Consequences of Stabilization Policies

• Budget balance: the difference between tax revenue and government spending
• National debt: the accumulation of past budget deficits, minus past budget surpluses
• Contractionary monetary policy: monetary policy that reduces aggregate demand
• Monetary neutrality: the idea that changes in the money supply have no real effects on the economy
• Short-Run Phillips Curve: the negative short-run relationship between the unemployment rate and the inflation rate

  
• Non-accelerating inflation rate of unemployment (NAIRU): the unemployment rate at which inflation does not change over time
• Quantity theory of money: emphasizes the positive relationship between the price level and the money supply; it relies on the velocity equation (M x V = P x Y)
• Velocity of money: the ratio of nominal GDP to the money supply; it is a measure of the number of times the average dollar bill is spent per year

  
• Labor productivity: output per worker; also referred to as simply productivity; increases in labor productivity are the only source of long-run economic growth.
• Physical capital: consists of human-made goods such as buildings and machines used to produce other goods and services
• Human capital: the improvement in labor created by the education and knowledge of members of the workforce
• Aggregate production function: a hypothetical function that shows how productivity (output per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology

  
• Long Run Phillips Curve: shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

  
• Disinflation: a reduction in the rate of inflation

  
• Hyperinflation: Inflation exceeding 50% per month

  
• Deficit spending: Government practice of spending more than it takes in from taxes
• Budget deficit: annual government spending and transfer payments are greater than tax revenue
• Budget surplus: annual government spending and transfer payments are less than tax revenue

  
• Entitlements: Policies for which Congress has obligated itself to pay X level of benefits to Y number of recipients. Affordable Care Act payments are an example.
• Crowding out: a decline in private expenditures as a result of an increase in government purchases that are financed through government borrowing

  
• GDP per capita: GDP divided by population
• Economic growth: the ability of the economy to increase the production of goods and services

  
• Supply-side fiscal policy: government policies designed to increase production by reducing business taxes and/or regulation