Macro Foundations · intro
What moves on the Business Cycle Phases diagram
A severe negative demand shock drives actual output well below trend and raises cyclical volatility, opening a large negative output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack..
The straight line is trend output; the wave is what the economy actually produces.
A public health emergency shuts down travel, hospitality and retail almost overnight.
Actual output collapses far below trend, and the swings get much wider.
That vertical distance is the output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack.. A negative gap this large means idle capacity and rising unemployment.
Examiners ask this as: pandemic, covid, sudden recession, output gap, lockdown.
Other scenarios on Business Cycle Phases