Unit 7: The Business Cycle
Why an economy that grows steadily over decades still lurches up and down year to year, and how economists date and size those swings.
4 topics · 13 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
Phases of the Business Cycle
- How it worksWalk me through peak, recession, trough, and expansion traced out along a real GDP time path.
- Common mistakeWhy isn't a recession simply defined as one bad quarter of economic growth?
- Going furtherWhat happens to unemployment and inflation as an economy moves through each phase of the cycle?
Your turn1 of 2
Find the percent decline in real GDP from a peak of 21089 billion dollars to a trough of 17622 billion dollars.Output Gaps and Potential GDP
- How it worksHow does the gap between actual and potential real GDP get measured and tracked over time?
- Worked exampleFind the output gap when actual real GDP is 21.5 trillion dollars and potential output is 22.4 trillion dollars.
- Common mistakeWhy isn't potential output the largest amount an economy could physically ever produce?
- Ties togetherHow does the size of the output gap line up with the size of cyclical unemployment through Okun's rule of thumb?
Your turn1 of 2
Find the output gap when actual real GDP is 22 trillion dollars and potential output is 23 trillion dollars.Leading, Lagging, and Coincident Indicators
- How it worksHow do leading, coincident, and lagging indicators each tell a forecaster something different about timing?
- Going furtherWhat happens to the unemployment rate, a classic lagging indicator, in the months right after a recession officially ends?
- Common mistakeWhy isn't a single indicator turning down proof that a recession has already started?
Your turn1 of 2
Building permits tend to fall months before a recession actually begins, while the unemployment rate tends to keep rising for months after a recession has technically ended. What kind of indicators does this make building permits and the unemployment rate, respectively?Dating a Recession
- How it worksHow does a committee combine employment, income, and output data to pin down exactly when a recession began?
- Common mistakeWhy isn't two straight quarters of falling GDP the official rule used to declare a recession?
- Going furtherWhat happens to a committee's recession call when employment and GDP data point in opposite directions?
Your turn1 of 2
A common rule of thumb says a recession is two consecutive quarters of falling real GDP. Could a recession be officially declared in the United States without that two-quarter pattern ever appearing?