Chapter 12 - Business Cycles

Business Cycles

Short-term fluctuations in GDP and other variables

Recession

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

Depression

A particularly severe recession.

Peak

The beginning of a recession (high point of the business cycle).

Trough

The end of a recession (low point of the business cycle).

Expansion

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

Boom

A strong and long-lasting expansion

Potential output (Y*)

The maximum sustainable amount of output that an economy can produce

Output gap

The difference between the economy’s actual output and its potential output, relative to potential output

Recessionary gap

A negative output gap; Y* > Y

Expansionary gap

A positive output gap; Y* < Y

Frictional unemployment

Short-term unemployment related to matching of workers and jobs.

Structural unemployment

Long-term chronic unemployment due to mismatched skills.

Cyclical unemployment

Overall unemployment that results directly from cycles of economic upturn and downturn. Is the difference between total unemployment, u, and u*

natural rate of unemployment, u*

The sum of frictional and structural unemployment

Okun's law

Relates cyclic unemployment changes to changes in the output gap