GLOSSARY
- Macroeconomy: Macroeconomy is the line of the economic theory which instead of approaching the problems from the individual point of view it contemplates them by considering the economy as a set of economic relations, or in other words, the aggregations of the parts. Therefore, when we talk about the economy of a nation-state and the most important issues that can be managed concerning the aggregate functioning of the economy we are talking about: full employment, economic growth, price stability and equitable rent distribution.
- Neoclassical model: The neoclassical model is based on the hypothesis that the economy automatically reaches full employment and for this reason, the aggregate supply is fixed at a certain quantity completely inelastic to prices. Furthermore, it establishes that prices are completely flexible so that they can go up or down as necessary to automatically correct the inequality that may occur between aggregate supply and demand. Under these conditions, intervention through demand is rejected because it would only lead to price increases.
- Keynesian model: The Keynesian model is based on the consideration that prices are very rigid, so they cannot guarantee equilibrium by themselves. Therefore, a situation of equilibrium with unemployment can occur. When the latter happens, it is useful to resort to increases in demand to achieve more income and employment.
- Aggregate demand: The aggregate demand is a macroeconomic measurement of the total amount of demand for all finished goods and services produced in an economy. Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time. In other words, it is the sum of the aggregate consumption, the aggregate investment and the public expenditure.
- Aggregate supply: The aggregate supply is the amount of production of goods and services that companies in an economy as a whole are willing to bring to the market at different levels of existing prices. Many factors influence the aggregate supply: the availability of an economically active population, the capital in stock, and the technology. All of these factors, once aggregated, determine the level of production of an economy.
- Inflation: Inflation, or in other words the instability of prices, is one of the causes of very negative disturbance in the economy of a nation. Combating inflation and not affecting growth and employment is an unresolved challenge. Traditionally, there have been three main explanations for inflation: push of demand-side which occurs due to an excessive pressure on spending; push of costs, a pressure that comes from costs, mainly from wages; and structural inflation, which explains the increase in prices which is part of the general nature of the economic system.
- Pro-cyclical and counter-cyclical policies: they refer to a strategy applied by the government that is positively (procyclical) or negatively (countercyclical) correlated with business cycle fluctuations in the gross domestic product (GDP). A pro-cyclical fiscal policy occurs when governments choose to increase public spending and reduce taxes during an economic expansion, but reduce spending and increase taxes during a recession. A counter-cyclical fiscal policy on the other hand, operates by reducing spending and raising taxes during a boom period to control inflation and debt, and increasing spending and cutting taxes during a recession to create a demand that can drive an economic boom.
