Unit 14: The business cycle

• Business cycle model:

a model showing the increases and decreases in a nation's real GDP over time; this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output.

• Expansion:

the phase of the business cycle during which output is increasing

• Recession:

the phase of the business cycle during which output is falling

• Depression:

a deep and prolonged recession

• Peak:

the turning point in the business cycle between an expansion and a contraction; during a peak in the business cycle, output has stopped increasing and begins to decrease.

• Trough:

the turning point in the business cycle between a recession and an expansion; during a trough in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again.

• Recovery:

when GDP begins to increase following a contraction and a trough in the business cycle; an economy is considered in recovery until real GDP returns to its long-run potential level.

• Potential output:

the level of output an economy can achieve when it is producing at full employment; when an economy is producing at its potential output, it experiences only its natural rate of unemployment, no more and no less.

• Growth trend:

the straight line in the business cycle model, which is usually upward-sloping and shows the long-run pattern of change in real GDP over time

• Positive output gap:

the difference between actual output and potential output when an economy is producing more than full employment output; when there is a positive output gap, the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its PPC (the production possibilities curve).

• Negative output gap:

the difference between actual output and potential output when an economy is producing less than full employment output; when there is a negative output gap, the rate of unemployment is greater than the natural rate of unemployment and an economy is operating inside its PPC.