Macro Foundations · intro
What moves on the Business Cycle Phases diagram
A strong positive demand shock lifts actual output above trend, creating a positive output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. and inflationary pressure as capacity constraints bind.
Trend output is what the economy can sustain; actual output can run above it for a while.
Households unleash savings built up during the downturn and spending surges.
Actual output pushes above the trend line: a positive output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack..
Above-trend output is not free. Firms bid for scarce workers and materials, which is how a boom turns into inflationinflationA sustained rise in the overall price level, eroding money's purchasing power..
Examiners ask this as: consumer boom, overheating, positive output gap, above trend, spending surge.
Other scenarios on Business Cycle Phases