Ch 10. Short-Term Economic Fluctuations

Question 1

Recession (or contraction)

Answer 1

A period in which the economy is growing at a rate significantly below normal

Question 2

Depression

Answer 2

A particularly severe or protracted recession

Question 3

Peak

Answer 3

The beginning of a recession; the high point of economic activity prior to a downturn

Question 4

Trough

Answer 4

The end of a recession; the low point of economic activity prior to a recovery

Question 5

Expansion

Answer 5

A period in which the economy is growing at a rate significantly above normal

Question 6

Boom

Answer 6

A particularly strong and protracted expansion

Question 7

Potential output Y* (or potential GDP or full-employment output)

Answer 7

The maximum sustainable amount of output (real GDP) that an economy can produce

Question 8

Output gap Y - Y*

Answer 8

The difference between the economy’s actual output and its potential output at a point in time

Question 9

Recessionary gap

Answer 9

A negative output gap, which occurs when potential output exceeds actual output (Y > Y*)

Question 10

Expansionary gap

Answer 10

A positive output gap, which occurs when actual output is higher than potential output (Y > Y*)

Question 11

Natural rate of unemployment, u*

Answer 11

The part of the total unemployment rate that is attributable to frictional and structural unemployment; the unemployment rate that prevails when cyclical unemployment is zero. (so that the economy has neither recessionary or expansionary output gap)

Question 12

Okun’s law

Answer 12

Each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap, measured in relation to potential output