Boom, peak, recession, trough, the anatomy of fluctuations around trend growth.
Warming up the engine…
The recurring, irregular fluctuation of output around trend: expansion, peak, contraction/recession, trough, recovery, with unemployment and inflation dancing counter to each other across phases.
Output gap = (Y − Y*) / Y* ; Okun's rule of thumb: 1pt extra unemployment ≈ 2% output loss
Cycles are neither regular clockwork nor pure noise: expansions die of tightening or shocks rather than old age, recessions are shorter and sharper than booms, and investment swings far harder than consumption, the volatile component driving the ride.
Know which indicators lead (building approvals, confidence), lag (unemployment), and coincide (GDP itself).
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Current equations
The economy breathes. The dashed line is trend: what steady growth alone would deliver. The solid line is what actually happens: expansions that overshoot, peaks, recessions, troughs, recoveries. The vertical gap between them at any moment is the output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack..