THE BUSINESS CYCLE

Define potential output

The level of output that is produced where the unemployment rate is equal to the natural rate of unemployment.

When does potential output happen

Current unemployment rate = Natural rate of unemployment

What does the business cycle describe?

The business cycle describes the "ups" of an economy (increases in real GDP and decreases in the unemployment rate) and the "downs" of an economy (decrease in real GDP and increases in the unemployment rate). Changes in these measures of economic performance are caused by changes in conditions that change aggregate demand or aggregate supply.

Y axis of the business cycle

Real GDP

X axis of the business cycle

Time

If the current rate of unemployment is equal to the natural rate of unemployment, what is true?

Current real gross domestic product (GDP) is equal to potential GDP.