AP Macroeconomics 2.7 - The Business Cycle and Circular Flow Flashcards

Vocabulary flashcards covering AP Macroeconomics 2.7 concepts, including the Business Cycle, Production Possibilities Curve comparisons, macroeconomic targets, and the Circular Flow model.

Business Cycle Model

A model showing that an economy (real GDP) expands and contracts over time.

PPC and the Business Cycle Model

A model connecting positions on a Production Possibilities Curve to cyclical unemployment and business cycle phases.

Positive Output Gap

An inflationary gap that occurs when actual real GDP is above potential full employment real GDP.

Negative Output Gap

A recessionary gap that occurs when actual real GDP is below potential full employment real GDP.

Recession (Contraction)

A phase of the business cycle where real GDP contracts between a peak and a trough.

Recovery (Expansion)

A phase of the business cycle where real GDP expands between a trough and a peak.

Peak

The highest level of real GDP reached in a business cycle phase before a recession begins.

Trough

The lowest level of real GDP reached in a business cycle phase before a recovery begins.

Point A (PPC and Business Cycle)

Represents a recession characterized by high unemployment ($6\%+$ unemployment) located inside the full employment curve.

Point B (PPC and Business Cycle)

Represents full employment with no cyclical unemployment ($4\text{ to }6\%$ unemployment) located directly on the full employment curve.

Point C (PPC and Business Cycle)

Represents high output with super low unemployment leading to inflation, located beyond the full employment curve.

Normal U.S. GDP Growth Range

Approximately $2\%$ growth, year over year.

Normal U.S. Unemployment Rate Range

Between $4\%$ and $6\%$ unemployment.

Normal U.S. Inflation Target

A target of $2\%$ inflation, year over year.

Households

The consumer decision-making units in the circular flow model.

Firms

The business decision-making units in the circular flow model.

Goods and Services Markets

The product markets in the circular flow model where finished products are sold by firms and purchased by households.

Factor Markets

Markets for inputs (labor, capital, land, etc.) where consumers supply labor and businesses purchase inputs.