Macro Foundations · intro
What moves on the Business Cycle Phases diagram
Stimulus lifts actual GDP above potential. A positive output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. trades faster recovery for inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. pressure: the central policy dilemma of every boom.
Policy makers respond to a downturn with overwhelming force.
Cheques land, rates sit at zero, and spending roars back.
Actual GDP overshoots trend: a positive output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack. opens.
Above-potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust. means labour shortages and inflationinflationA sustained rise in the overall price level, eroding money's purchasing power. pressure. The 2021-22 inflation debate was exactly about whether this gap got too big.
Examiners ask this as: stimulus, overheating, spending spree, fiscal splurge, boom.
Other scenarios on Business Cycle Phases