The Business Cycle

Question 1

Define ‘expansion’

Answer 1

• Occurs when there is positive growth in real GDP
• Employment of resources increases
• General price level of the economy begins to rise more rapidly

Question 2

Define ‘peak’

Answer 2

• Represents the cycle’s maximum real GDP
• Marks the end of an expansion
• Unemployment of resources has fallen substanially

Question 3

Define ‘contraction’

Answer 3

• Falling real GDP
• If it lasts 6 months, it is a recession
• Growing unemployment of resources
• Prices in some sectors may fall

Question 4

Define ‘trough’

Answer 4

• Minimum level of GDP

* May be widespread unemployment

Question 5

How does unemployment relate to actual and potential output?

Answer 5

Real GDP grows: unemployment falls

Real GDP falls: unemployment grows

Question 6

Define ‘potential output’

Answer 6

When actual GDP lies above or below potential GDP, this is the output gap.