Arousal refers to a dog's general level of physical and mental activation, ranging from very calm and relaxed through to highly excited or highly stressed. It's a neutral term. High arousal isn't automatically bad, and low arousal isn't automatically good. What matters is whether the level of arousal fits the situation.
A dog can be highly aroused from excitement, such as at the start of a game of fetch, or highly aroused from stress, such as when frightened by a loud noise. Both look similar from the outside, even though the underlying emotional state is different.