4 Short-run intro and business cycles (W3 L5)

What is the difference between trends, business cycles and seasonal cycles?

Trends fluctuate over multiple decades, business cycles over about 4 to 5 years, and seasonal cycles at regular, predictable times within a year.

What is potential output?

The amount of output produced when resources are used at their normal rate, the natural productive capacity of the economy. It reflects supply-side factors like labour, physical capital and technology. Actual output can be above or below it.

What does business cycle theory identify?

The shocks hitting the economy (supply, terms of trade, productivity, confidence, policy shocks) and the propagation mechanisms that transmit them through the economy.

Why is a business cycle framework useful?

It gives a way to evaluate the pros and cons of policies such as monetary and fiscal policy.

Peak

high-point of economic activity prior to downturn, marks end of expansion

Trough

low-point of economic activity prior to upturn, marks end of contraction

Recession

Often defined two consecutive quarters of negative real GDP growth, but this is just a 'rule of thumb'