week 20 Flashcards
what are business cycles
short term fluctuations in GDP and other variables
what is a recession
a period in which the economy is growing at a rate significantly below normal
real GDP falls, doesn’t have to be negative
what is a depression
a particularly severe recession
what is a peak
the beginning of a recession
high point in business cycle
what is a trough
the end of a recession
low point in business cycle
what is an expansion
a period in which the economy is growing at a rate significantly above normal
what is a boom
a strong, long-lasting expansion
what are the symptoms of business cycles
cyclical unemployment increases sharply during recessions
production of durable goods is more volatile than non-durable goods
what is potential output
Y*
the maximum sustainable output that an economy can produce
also called full-time employment output
grows over time
what is actual output
grows at a variable rate
reflects growth of Y*
does not always = potential output
what is the output gap
the difference between the economy’s actual output and potential output, relative to potential output at a point in time
how do you calculate output gap
(Y - Y) / Y x 100
what is a recessionary gap
negative output gap Y*>Y
output and employment are less than sustainable level
capital and labour resources are not fully utilised
output and employment below normal levels
what is an expansionary gap
Y*<Y
leads to inflation - reduces economic efficiency
higher output and employment
demands for goods exceeds the capacity to produce them and prices rise
what is the natural rate of unemployment
the sum of frictional and structural unemployment, u*
occurs when Y is at Y*
