Economics 101: FInal Exam

Items that are regularly used in economic transactions and accepted by buyers and sellers.

1) medium of exchange
2) unit of accounting
3) store of value

The Federal Reserve System serves as a central bank in the US. Four important functions:
1) to supply currency to the economy
2) to provide a system of check collection and clearing
3) to hold reserves from comercial banks and to regulate commercial banks
4) to conduct monetary policy

The Federal Reserve uses monetary policy to increase or decrease the money supply, affecting interest rates which ultimately shift the aggregate demand curve.

Gross Domestic Product. The total market value of all final goods and services produced in a country within a certain time period.

GDP that has been adjusted for changes in the price level, measured in constant dollars associated with a specific base year.

Variations around the trend in which economic growth may be faster or slower than average.

1) unemployment
2) inflation

The economic cost of unemployment is lost output, measured by the GDP gap, which shows the difference between actual output (inside the PPF) and potential output (on the PPF).

Unemployed + employed

(unemployed/ labor force) x 100

1) frictional - workers who are between jobs or searching for jobs

2) structural - workers whose skills are not matched to available jobs; require retraining/ education
3) cyclical - unemployment resulting from a recession (downturn in the business cycle)

Reflects persistent frictional and structural unemployment; in the U.S., the NRU is approximately 5%.

An economy is said to be fully employed when cyclical unemployment equals 0%.

A general rule for determining the GDP gap is that for every percentage point the RU exceeds the NRU, the GDP gap is 2%.