Macro Foundations · intermediate
What moves on the Business Cycle Phases diagram
Sustained external demand raises actual output toward trend and dampens cyclical volatility, closing a negative output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. through the expansion phase.
The economy starts below trend, in the recovery phase of the cycle.
Trading partners boom and demand for exports climbs steadily.
Actual output rises back toward the trend line and the swings become gentler.
This is the textbook expansion phase: the negative output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. closes and unemployment falls back toward its natural ratenatural rateThe unemployment level set by structural forces (matching, turnover, institutions) rather than the business cycle..
Examiners ask this as: recovery, export led, closing output gap, upswing, expansion phase.
Other scenarios on Business Cycle Phases