Recession: period of declining real incomes and rising unemployment // depression: severe recession. Variables gdp, unemployment, interest rates, exchange rates, price level. Policy instruments of government spending, taxes, and the money supply. Difference: time horizon, this is about short-run fluctuations (before about long-run) 3 key facts about economic fluctuation: economic fluctuations are irregular and unpredictable. Business cycle: fluctuations in the economy ( cycle doesn"t mean regular/predictable this time) Business is good: real gdp grows rapidly (customers plentiful, profits growing) Businesses have trouble: real gdp falls during recessions (declining sales, dwindling profits) As real gdp and investment spending falls, unemployment rises: most macroeconomic quantities fluctuate together. Real gdp used to monitor short-run changes (measure value of g&s/total income) Income, spending, and production fluctuate closely together, but different amounts: as outputs fall, unemployment rises. Real gdp declines, unemployment rate rises (produce less g&s lay off workers) Classical theory money is a veil : to understand real variables, look beneath the veil.