ECON 111-Chapter 17

Output gap

current GDP-Potential GDP/ Potential GDP

Business Cycles

short-term fluctuations in economic activity

What happens if we’re above potential?

Inflation will be stressed because unemployment is low.

What is a negative output gap?

Output is below potential, there are idle resources, and it typically corresponds with high unemployment

What is a positive output gap?

output is above potential output; the economy is using its resources with intensity

Potential output

level of output that occurs when all resources are fully employed

How does long-run economic growth reflect growth?

Reflects growth in an economy’s potential output- capital, technology

When does unemployment rise substantially?

During recession

What rises for a period post-recession?

Unemployment

Why does unemployment continue post-recession?

Discouraged workers, lagging indicators, going against economy.

What is a peak?

A high point.

What is a trough?

Low point.

What is a recession?

Declining economic activity, happens quickly

Expansion

period of increasing economic activity

Levels

Tell you where economy is

How do you look at where the economy is?

Look at the level of GDP relative to potential output

Changes

Tells where economy is going

How do you look where economy is going?

Look @ GDP growth rates

Recessions

Short and sharp

Expansions

Long and gradual