Nominal GDP is measured using current prices without any adjustment for inflation. This distinguishes it from real GDP, which adjusts for changes in the price level.

Central banks primarily use open market operations, which involve buying and selling government securities, to influence the money supply. This tool effectively alters bank reserves and short-term interest rates.

Expansionary fiscal policy involves increasing government spending or reducing taxes to stimulate economic activity and reduce unemployment. It is often employed during economic downturns to boost aggregate demand.

The unemployment rate measures the percentage of the labor force that does not have a job yet is actively looking for one. This indicator provides insight into the overall health of the labor market.

Reducing the reserve requirement allows banks to lend a greater portion of their deposits, which increases the money creation process. As a result, the overall money supply in the economy expands.

Real GDP adjusts nominal GDP for changes in the price level, which means it removes the effects of inflation or deflation. This adjustment allows for a more accurate comparison of economic output over time.

The multiplier effect shows that an initial change in government spending generates a chain reaction of increased consumption and income. This process results in a total impact on national income that is greater than the original spending change.

Expansionary fiscal policy is designed to boost economic activity by increasing government spending and/or cutting taxes. This directly raises aggregate demand and is commonly used during periods of economic slowdown.

When taxes rise, households have less disposable income, reducing their ability to consume goods and services. This decrease in consumption leads to a decline in aggregate demand, impacting overall economic growth.

Open market operations, involving the buying and selling of government bonds, are a primary tool of monetary policy. They directly influence bank reserves, interest rates, and ultimately the money supply.

A liquidity trap exists when interest rates are so low that monetary policy loses its ability to stimulate borrowing and spending. In such circumstances, additional increases in the money supply do not lead to increased economic activity.

The GDP deflator is a broad measure of inflation as it reflects changes in the prices of all domestically produced goods and services. This measure captures the impact of inflation on the overall economy more comprehensively than indices focusing on a single basket of goods.

Crowding out occurs when increased government borrowing raises interest rates, thereby reducing the level of private investment. This effect can mitigate the intended stimulus from expansionary fiscal policy.

Real interest rates are adjusted for inflation, making them a more accurate reflection of the true cost of borrowing. This adjustment is crucial for informed decision-making in investment and consumption.

GDP measures the total value of all goods and services produced within a country during a specific period. It is a comprehensive indicator of economic activity and the overall health of an economy.

An increase in the money supply shifts the money supply curve to the right, which leads to a lower equilibrium interest rate. Lower interest rates reduce the cost of borrowing, thereby encouraging more investment and spending in the economy.

When the economy is operating at full employment, additional government spending can push aggregate demand beyond the economy's productive capacity, causing demand-pull inflation. This scenario illustrates the potential inflationary pressure from expansionary fiscal measures in a tight labor market.

Stagflation is characterized by the unusual combination of high inflation and high unemployment, along with stagnant economic growth. This situation challenges typical economic theories that suggest an inverse relationship between inflation and unemployment.

Increasing the reserve requirement forces banks to hold a larger fraction of deposits, thereby reducing the funds available for loans. This restriction diminishes the money multiplier effect and ultimately contracts the overall money supply.

In a downturn, particularly when interest rates are near zero (a liquidity trap), further monetary easing has little effect on stimulating borrowing or spending. Fiscal policy, which directly increases aggregate demand through government expenditures or tax cuts, can be more effective under these conditions.