Business cycle

What does the linear line show

Long term growth trend, or potential output (potential GDP). Shows full employment

What does the cyclical line show

Actual output

What is expansion

Follows trough. Where there is positive growth in rGDP, shown by upward sloping parts of the cyclical curve

Employment increase, general price level of economy rise (inflation)

What is peak

maximum rGDP of a cycle. economy most likely experiencing inflation

What is contraction

Follows peak. Where there is negative growth in rGDP, shown by downward sloping parts of the cyclical curve

Employment decrease, increase of price level slows and might fall in some sectors

What is trough

minimum rGDP of a cycle. Widespread unemployment. End of a cycle

What defines a recession

When a contraction lasts more than 2 quarters (6 months)

Characterised by falling rGDP and growing unemployment.

Draw and label business cycle

Define full employment

Operating with natural rate of unemployment. Determined by position of LRAS

Output gap

Actual GDP - Potential GDP

Draw and label achievement of price stability on the business cycle

Draw and label economic growth on the business cycle