Question 1

What is the Business Cycle?

Accepted Answer

A cycle of fluctuations in the economy's GDP and other indicators

(expansions and contractions)

Question 2

What does it mean that the economy is cyclical?

Accepted Answer

Measures such as GDP, unemployment, etc. fluctuate in predictable patterns over time as the economy expands and contracts

(booms and busts)

Question 3

What are the parts of the Business Cycle?

Accepted Answer

Expansion: economy is growing in the short-term

Peak: output is at its maximum temporarily

Contraction: economy shrinks as growth slows

Trough: economy is at a low point

Question 4

What is expansion (in the business cycle)?

Accepted Answer

A period of economic growth where interest rates are low, production increases, and inflation rises

(also see inflationary gap)

Question 5

What is a peak (in the business cycle)?

Accepted Answer

The highest point of economic activity in the business cycle

(creates imbalances that lead to contraction)

Question 6

What is contraction (in the business cycle)?

Accepted Answer

A period of decline in economic activity where growth slows, employment falls, and prices stagnate

(surplus of goods; may lead to a depression if serious)

Question 7

What is a trough (in the business cycle)?

Accepted Answer

The lowest point of economic activity in the business cycle

(the cycle recovers and starts again after)

Question 8

What is an inflationary gap?

Accepted Answer

When the demand for goods and services in an economy exceeds the available supply, leading to higher prices and inflation

(occurs during expansion)

Question 9

What is the growth trend line?

Accepted Answer

The natural rate of real GDP growth over time that the economy hopes to maintain

The actual rate of unemployment equals the natural rate of unemployment when the economy is on the potential/trend line

Question 10

What is a peak in the business cycle?

Accepted Answer

A peak in the business cycle is when the growth of the economy slows until it reaches its highest point.

Question 11

What is a recession?

Accepted Answer

A period of two straight fiscal quarters (6 months) of negative real GDP growth

Question 12

What is a depression?

Accepted Answer

A depression is a particularly severe and long recession

Question 13

What is the difference between a recession and a depression?

Accepted Answer

A depression is much more severe than a recession

(recession has unemployment between 7-9%; a depression may have 25% unemployment)

Question 14

What is potential output?

Accepted Answer

The level of GDP where unemployment is equal to the natural rate of unemployment

2.7 Business Cycles, AP Macroeconomics Flashcards