11Chapter 8Business Cycles2Real Output of the U.S. economy3IntroductionThe observed changes in overall economic activity can be decomposed into two parts:Long-term growth path: the changes in economic performance over a long period of time, say between 1870 and 2007. Business cycles: repeated episodes of expansions and declines in output.This chapter is about the business cycles. We will discuss some of the basic features of business cycles.4What is a business cycle ?Business cycles are defined broadly as fluctuations of aggregate economic variables(not just real GDP). Other indicators of economic activity, such as employment, investment and financial market variables, are also important. These variables often move together in a similar pattern. The tendency of many economic variables to move together over the business cycle is called comovement.5How to describe a business cycle ?6How to describe a business cycle ?The period of time during which aggregate economic activity is falling is a contractionor recession. If the recession is particularly severe, it becomes a depression. The low point of the contraction is called a trough. After reaching the trough, aggregate economic activity begins to recover.
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