Chapter 21 - Short-term economic fluctuations

Peak

: beginning of a recession; the high point of economic activity prior to a downturn.

Depression

: particularly severe or protracted recession.

Business cycles

: short- term fluctuations in GDP and other variables.

Expansion

: period in which the economy is growing at a rate significantly above normal.

Recession

= contraction: period in which the economy is growing at a rate significantly below normal.

Business cycles

short-term fluctuations in GDP and other variables

Recession = contraction

period in which the economy is growing at a rate significantly below normal

Depression

particularly severe or protracted recession

Peak

beginning of a recession; the high point of economic activity prior to a downturn

Trough

end of a recession; the low point of economic activity prior to a recovery

Expansion

period in which the economy is growing at a rate significantly above normal

Boom

particularly strong and protracted expansion

Potential output, Y* (or potential GDP or full employment output)

maximum sustainable amount of output (real GDP) that an economy can produce

Output gap

difference between the economy's actual output and its potential output, relative to potential output, at a point in time

Recessionary gap

negative output gap, which occurs when potential output exceeds actual output (Y < Y*)

Expansionary gap

positive output gap, which occurs when actual output is higher than potential output (Y > Y*)

Natural rate of unemployment, u*

part of the total unemployment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so that the economy has neither a recessionary nor an expansionary output gap

Okun's law

each extra percentage point of cyclical unemployment is associated with about a 2 percent widening of a negative output gap, measured in relation to potential output

Business cycles

Short-term fluctuations in GDP and other variables

Recession = contraction

Period in which the economy is growing at a rate significantly below normal

Depression

Particularly severe or protracted recession

Peak

Beginning of a recession; the high point of economic activity prior to a downturn

Trough

End of a recession; the low point of economic activity prior to a recovery

Expansion

Period in which the economy is growing at a rate significantly above normal

Boom

Particularly strong and protracted expansion

Potential output, Y* (or potential GDP or full employment output)

Maximum sustainable amount of output (real GDP) that an economy can produce

Output gap

Difference between the economy's actual output and its potential output, relative to potential output, at a point in time

Recessionary gap

Negative output gap, which occurs when potential output exceeds actual output (Y < Y*)

Expansionary gap

Positive output gap, which occurs when actual output is higher than potential output (Y > Y*)

Natural rate of unemployment, u*

Part of the total unemployment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so that the economy has neither a recessionary nor an expansionary output gap

Okun's law

Each extra percentage point of cyclical unemployment is associated with about a
2 percent widening of a negative output gap, measured in relation to potential output