Download Business Cycles

Business Cycles
The Business Cycle
Boom/Peak
Contraction
&
Recession
Expansion
&
Recovery
Depression
Recovery
The business cycle is the cycle of
expansion and contraction in the
economy.
Long-run
trend of
output
Peak
Real
GDP
Trough
Time
An expansion is a sustained rise in the
real ouput of an economy
 A contraction is a sustained fall in the
real output of an economy
 A peak is the point in the business
cycle at which real output is at its
highest
 A trough is the point in the business
cycle at which real output is at its
lowest

When actual output exceeds potential output, the
resulting inflationary gap is the difference
between the real output (point a) and potential
output (point b).
Real output then falls below its potential level. In
this case, the recessionary gap is the amount by
which real output falls short of its potential (the
difference between point c and d).
Peak
Real
GDP
a
c
Inflationary
Gap
d
b
Trough
Time
Long-run
trend of
output
(potential)
Recessionary Gap
Assignment

Using your text, summarize the
following:
– the role of expectations on a contraction
and expansion
– the effects of a contraction/expansion
– recession/depression