Macro Foundations · intro
What moves on the Business Cycle Phases diagram
A demand collapse drags actual GDP below potential, opening a negative output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack.. Trend is untouched: the economy's capacity remains, unused.
The economy is humming along its cycle around trend.
A banking crisis freezes credit; spending and investment collapse.
Actual GDP plunges below trend: a deep negative output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. opens.
Recovery from financial recessions is famously slow, and the deeper the gap, the more capacity and careers sit idle. This is 2008 in one picture.
Examiners ask this as: financial crisis, gfc, credit crunch, recession, banking collapse.
Other scenarios on Business Cycle Phases