business cycle Flashcards
what is a business cycle?
short-term fluctuations in economy activity
what is potential output?
the level of output that occurs when all resources are fully employed
what is the output gap?
the difference between actual and potential output, measured as a percentage of potential output
what is the formula for output gap?
( (actual output - potential output) / potential output ) * 100
when does a negative output gap occur?
when actual output is below its potential: there are idle resources, and it typically corresponds with high unemployment
when does a positive output gap occur?
when actual output is above potential output: the economy is using its resources with intensity
what are the phases of the business cycle?
peak: a high point in economic activity
trough: a low point in economic activity
recession: a period of declining economic activity
expansion: a period of increasing economic activity
explain the difference between levels vs. changes?
levels tell us where the economy is (look at level of GDP relative to potential output to see where economy is)
changes tell us where the economy is going (look at GDP growth rate to tell us if the economy is expanding or contracting)
what are the characteristics of a recession?
short and sharp
what are the characteristics of an expansion?
long and gradual
how do you predict how the economy will perform?
business cycles are persistent
the economy is likely to perform the same this year as it did last year
what is a leading indicator?
variables that tend to predict the future path of the economy
what are lagging indicators?
variables that follow the business cycle with a delay
what is Okun’s Rule of Thumb?
for every percentage point that actual output falls below potential output, the unemployment rate increases around half a percentage point
what is seasonally adjusted data?
seasonally adjusted data are stripped of predictable seasonal patterns