2.7 Business Cycles
The business cycle is the rise and fall of real GDP around potential output: expansion up to a peak, contraction (recession) down to a trough, then recovery.
The business cycle is the fluctuation of actual real GDP around the economy's long-run growth trend of potential output. Its four phases: expansion (real GDP rising), peak (the top), contraction or recession (real GDP falling, cyclical unemployment rising), and trough (the bottom, where recovery begins).
Output gaps compare actual output to potential output, what the economy produces at full employment. Actual below potential is a recessionary (negative) gap with cyclical unemployment; actual above potential is an inflationary (positive) gap, where output runs beyond sustainable capacity and the price level gets pushed up.
This vocabulary powers Unit 3: every AD-AS graph you draw will show equilibrium output at, below, or above full-employment output. Practice naming the gap from a graph instantly, it is usually the first point of the FRQ.
Key terms for 2.7
Drag the curves above, or open the full Business Cycle sandbox. Teaching this? Put this graph on your own class page, free.
Calling any slowdown a recession. If real GDP grows 3% one year and 1% the next, the economy is still expanding, a recession requires real GDP to actually fall.
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A full lesson plan for 2.7, with timings, a warm-up, guided practice and an exit ticket.
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