Fiscal Policy Basics

Higher government spending creates more demand as resources are used for public projects, boosting the economy.

More taxes bring more money into the government's hands, potentially boosting demand as the government then spends more.

Fiscal policy that aims to put more money in people's hands to increase demand and economic activity.

Fiscal policy that aims to take more money out of people's hands to decrease demand or economic activity.

Government actions related to spending and taxation to influence the economy.

The total demand for all goods and services in an economy at all possible price levels.

The total quantity of goods and services that firms are willing to produce at all possible price levels.

The point where Aggregate Demand (AD) and Aggregate Supply (AS) curves intersect, determining the equilibrium price level and output (GDP).

A significant decline in economic activity, typically caused by a drop in Aggregate Demand leading to lower output (GDP) and higher unemployment.

An increase in the average prices of goods and services in an economy.

Unemployment caused by fluctuations in the business cycle, rising during recessions and falling during expansions.

The healthy unemployment rate that exists even in a strong economy. It's not 0% because some people are always transitioning between jobs.

A relationship between unemployment and GDP. It shows how much GDP decreases for every 1% increase in unemployment.

Okun's Law measures the difference between actual GDP and potential GDP, highlighting the economic cost of unemployment.

The typical Okun's Law factor is 2%, meaning a 1% increase in unemployment leads to a 2% decrease in GDP.