Recessions and Economic Fluctuations

Vocabulary flashcards for understanding recessions and economic fluctuations.

Recession

Period of declining real incomes and rising unemployment.

Rule of thumb for Recession

Two consecutive quarters of negative real GDP growth.

Depression

Severe recession.

Rule of thumb for Depression

Three consecutive years of negative real GDP growth, or a 10% decline in real GDP.

Key fact about economic fluctuations #1

Economic fluctuations are irregular and unpredictable.

Key fact about economic fluctuations #2

As output falls, unemployment rises.

Key fact about economic fluctuations #3

Most macroeconomic quantities fluctuate together; recessions are economy-wide phenomena.

Long-run equilibrium

Intersection of Aggregate Demand (AD), Long-Run Aggregate Supply (LRAS), and Short-Run Aggregate Supply (SRAS) curves.

First way to a recession

A fall in aggregate demand leading to a leftward shift in the AD curve.

Long-Run Result of Decrease in Aggregate Demand

Output returns to the natural rate and price level falls.

Second way to a recession

An increase in production costs shifts the short-run aggregate supply curve to the left

Short-Run Result of a Decrease in Aggregate Supply

Output falls, price level rises (stagflation).

Long-Run Result of Decrease in Aggregate Supply

Output returns to natural rate and price level returns.

Stagflation

A situation in which output falls and the price level rises.