LM2: understanding business cycles

Business cycle

Fluctuations in aggregate economic activity with expansions and contractions

Expansion

Period when economic activity rises above potential

Contraction

Period when economic activity falls below potential

Recovery

Phase where the economy begins to grow after a trough

Slowdown

Phase where growth slows after reaching a peak

Positive output gap

Economy operating above potential output

Negative output gap

Economy operating below potential output

Classical cycle

Fluctuations in GDP levels

Growth cycle

Fluctuations around long-term trend

Growth rate cycle

Fluctuations in growth rate

Credit cycle

Changes in availability and cost of credit over time

Credit expansion

Increased availability of credit with favorable terms

Credit contraction

Reduced credit availability with higher borrowing costs

Leading indicator

Indicators that predict future economic activity

Coincident indicators

Indicators that reflect current economic conditions

Lagging indicators

Indicators that confirm past economic trends

Composite indicators

Indices combining multiple economic indicators

Capital spending

Expenditures on fixed assets by firms

Inventory-sales ratio

Measure of inventory relative to sales

Nowcasting

Estimating current economic conditions using real-time data