GDP stands for Gross Domestic Product, which represents the total market value of all final goods and services produced within a country in a given period. This measure is a primary indicator of a nation's economic performance.

Inflation is defined as a sustained increase in the overall price level of goods and services in an economy. This phenomenon reduces the purchasing power of money over time.

Fiscal policy focuses on the use of government spending and taxation to influence the economy. It is a primary tool used to manage economic fluctuations and stimulate growth.

Monetary policy involves managing the money supply and setting interest rates to influence economic activity. Central banks use this policy to stabilize prices and support employment.

The unemployment rate measures the proportion of the labor force that is actively seeking employment but is unable to find work. This indicator is critical for assessing the health of an economy.

The aggregate demand curve depicts the relationship between the overall price level and the total demand for goods and services in an economy. It helps economists understand how various price levels affect overall spending.

Potential GDP refers to the level of output an economy can achieve when operating at full capacity without triggering inflation. It illustrates the sustainable productive capacity of an economy.

A decrease in taxes leaves consumers with more disposable income, which typically boosts consumption. This increase in spending raises the overall aggregate demand in the economy.

The multiplier effect explains how an initial injection of spending can lead to a greater overall increase in national income. It demonstrates the cascading impact of fiscal or monetary policies on aggregate demand.

Central banks employ open market operations to buy or sell government securities, thereby influencing the money supply and interest rates. This tool is one of the most direct methods to affect economic activity.

The Consumer Price Index (CPI) tracks the changes in the prices of a selected basket of goods and services purchased by urban households. It is widely used to measure inflation and assess changes in the cost of living.

Contractionary monetary policy is designed to reduce the money supply and increase interest rates, thereby cooling an overheated economy. This approach is effective in curbing high inflation.

Increasing government spending during a recession is a classic example of expansionary fiscal policy. This policy aims to boost aggregate demand and stimulate economic recovery.

During a recession, central banks typically lower interest rates to make borrowing cheaper and encourage investment. This action aims to stimulate economic growth and increase aggregate demand.

Real GDP adjusts nominal GDP for changes in the price level, providing a clearer measure of economic growth. This adjustment removes the effects of inflation and reflects the true change in output.

In a liquidity trap, interest rates are so low that traditional monetary policy tools lose their impact. With rates near zero, additional monetary expansion does not effectively stimulate borrowing or spending.

A decrease in aggregate supply reduces the overall availability of goods and services, which pushes prices up and output down. This scenario, known as cost-push inflation, results in both higher inflation and lower real GDP.

Stagflation is characterized by slow or stagnant economic growth combined with high inflation. This scenario presents a unique challenge because policies that tackle inflation might further impede growth.

High government debt levels can raise interest rates over time as the government competes for credit in the market. This higher cost of borrowing may crowd out private investment, thereby hindering long-term economic growth.

When people expect higher inflation in the future, they often decide to spend and invest sooner rather than later. This acceleration of demand can lead to increased prices in the present, thus reinforcing inflationary pressures.