100. In a modern dynamic economy such as the United States, full employment generally means
a.
cyclical unemployment is present.
b.
everyone (excluding teenagers) that would like to work is employed.
c.
approximately 95 percent of the labor force is employed.
d.
100 percent of the labor force is either working or seeking work.
101. If unemployment in the United States was approximately 5 percent, most economists would believe
that the economy was
a.
experiencing abnormally high unemployment.
b.
at or near full employment.
c.
experiencing an abnormally high labor force participation rate.
d.
in the midst of a strong economic boom.
102. Full employment means which of the following is zero?
a.
structural unemployment
b.
cyclical unemployment
c.
frictional unemployment
d.
aggregate unemployment
103. Which of the following is true?
a.
The natural rate of unemployment is present when the economy is operating at full
employment.
b.
The natural rate of unemployment is equal to the number of persons unemployed divided
by the number of persons in the labor force.
c.
The natural rate of unemployment is primarily the result of the ups and downs of the
business cycle.
d.
Public policy cannot influence the natural rate of unemployment.
104. The natural rate of unemployment
a.
is a temporary low rate that cannot be maintained.
b.
is fixed; it cannot be altered by public policy.
c.
is equal to the number of persons unemployed divided by the number in the labor force.
d.
is the unemployment rate accompanying the economy’s maximum sustainable rate of
output.
105. The natural rate of unemployment
a.
increases sharply during a recession but declines significantly during a business
expansion.
b.
is the unemployment rate accompanying the economy’s maximum sustainable output.
c.
is generally less than the unemployment rate associated with the economy’s
full-employment rate of output.
d.
is present when the economy operates at approximately 94 percent of its potential GDP.
106. The natural rate of unemployment
a.
is due to cyclical business conditions.
b.
results from normal dynamic changes given the institutional arrangements of the economy.
c.
results from both frictional and cyclical economic conditions.
d.
is present when the economy is at the peak of an economic boom.
107. The natural rate of unemployment is not zero because
a.
some workers will always have few skills.
b.
unemployment will always rise during the recessionary phase of the business cycle.
c.
the economy is characterized by dynamic change and imperfect information.
d.
not every member of society is capable of participating in the labor force.
108. Teenage unemployment is substantially higher than unemployment among prime-age workers because
teenagers
a.
are more likely to switch jobs and move into and out of the labor force.
b.
are less likely to be in the labor force than are older workers since many teenagers are still
in school.
c.
are more likely to be in the armed forces, therefore, they’re counted as unemployed.
d.
generally think they can find jobs that are available only to experienced, highly skilled
workers if they just search diligently enough.
109. Which of the following will most likely reduce the natural rate of unemployment?
a.
an increase in the minimum wage
b.
an increase in unemployment benefits
c.
an increase in the proportion of prime-age workers (35-54) as a share of the labor force
d.
an increase in the labor force participation rate of teenagers
110. Which of the following will most likely cause a decrease the natural rate of unemployment?
a.
an increase in the minimum wage
b.
an increase in unemployment benefits
c.
an increase in experienced workers aged 25 and over as proportion of the labor force
d.
an increase in the labor force participation rate of teenagers
111. Which of the following will most likely increase the natural rate of unemployment?
a.
a decrease in the minimum wage
b.
an increase in unemployment benefits
c.
an increase in the number of people who stop looking for a job
d.
an increase in the proportion of prime-age workers as a share of the labor force
112. The current U.S. unemployment insurance program
a.
tends to significantly lower the unemployment rate.
b.
tends to modestly lower the unemployment rate.
c.
has no effect on the unemployment rate.
d.
tends to raise the unemployment rate.
113. The current U.S. unemployment insurance program tends to
a.
increase the incentive to switch occupations.
b.
reduce the time workers stay unemployed.
c.
make it more costly for unemployed workers to turn down available jobs.
d.
raise the unemployment rate.
114. Which of the following about unemployment is true?
a.
The unemployment rates of the major European economies have been lower than the
United States during the last decade.
b.
The natural rate of unemployment is unaffected by labor market regulations and other
dimensions of public policy.
c.
High unemployment rates over lengthy time periods are indicative of structural factors that
are adversely affecting the natural rate of unemployment.
d.
The unemployment rates of Spain and Italy were among the lowest in the world during the
past two decades.
115. Which of the following about unemployment is true?
a.
The unemployment rates of the major European economies were substantially lower than
in the United States during the last decade.
b.
High unemployment rates over lengthy time periods are indicative of structural and
regulatory factors that are exerting an adverse impact on the natural rate of unemployment.
c.
The natural rate of unemployment is unaffected by changes in the age composition of the
labor force (for example, an increase in the relative number of youthful workers).
d.
Institutional changes such as an increase in the minimum wage may increase cyclical
unemployment but will not affect the natural rate of unemployment.
116. During an economic boom period, the actual rate of unemployment will be
a.
less than the natural rate of unemployment.
b.
greater than the natural rate of unemployment.
c.
equal to the natural rate of unemployment.
d.
unaffected by the economic expansion.
117. During a recession, the actual rate of unemployment will be
a.
less than the natural rate of unemployment.
b.
greater than the natural rate of unemployment.
c.
equal to the natural rate of unemployment.
d.
unaffected by the economic contraction.
118. The actual rate of unemployment will generally
a.
increase as an economy enters an economic boom period.
b.
decrease as an economy enters an economic boom period.
c.
exceed the natural rate of unemployment during an economic boom period.
d.
do both a and c.
119. The actual rate of unemployment will generally
a.
increase as an economy enters a recession.
b.
decrease as an economy enters a recession.
c.
fall below the natural rate of unemployment during a recession.
d.
do both a and c.
120. Potential output is the
a.
maximum rate of output that can ever be achieved.
b.
highest rate of output that has ever been achieved in the past.
c.
maximum sustainable output level consistent with the economy’s resource base and
current institutions.
d.
the rate of output present when the general level of prices is unstable.
121. The economy’s potential output is
a.
the maximum output that could be achieved temporarily during a time of economic boom.
b.
the minimum output that could be achieved during a recession.
c.
present when 100 percent of the labor force is employed.
d.
the maximum sustainable output of the economy given its resources.
122. Potential GDP
a.
is always less than actual GDP.
b.
is identical to actual GDP.
c.
measures inflation.
d.
is the output an economy could produce at full employment.
123. The difference between actual real GDP and potential GDP
a.
decreases as the unemployment rate rises.
b.
increases as the unemployment rate rises.
c.
increases as the employment rate rises.
d.
decreases as the labor force increases.
124. Full employment
a.
exists when everyone in the economy has a job
b.
exists when everyone who wants a job has one
c.
exists when the unemployment rate is zero
d.
exists when everyone in the labor force has a job
e.
will always include some unemployment
125. If the economy were at its potential output level, which of the following is not true?
a.
The actual unemployment rate would equal the natural rate.
b.
There would be some cyclical unemployment.
c.
There would be some frictional unemployment.
d.
There would be some structural unemployment.
126. If an economy is at its potential output level, which of the following is not true?
a.
The economy is at its full-employment output level.
b.
Unemployment is at the natural level.
c.
The price level is zero.
d.
The output level being produced can be sustained indefinitely given the economy’s
resources and technology.
e.
The only unemployment is frictional or structural.
127. Which of the following types of unemployment can exist in an economy that is at its potential output
level?
a.
cyclical unemployment only
b.
structural unemployment only
c.
frictional, cyclical, and seasonal unemployment only
d.
frictional, seasonal, and structural unemployment only
e.
there will be no unemployment in an economy that is at the potential output level
128. During an economic boom,
a.
the actual rate of unemployment will exceed the natural rate of unemployment.
b.
the output of the economy will exceed its long-run potential output.
c.
widespread unemployment will cause inflation to increase.
d.
the actual rate of unemployment will equal the natural rate of unemployment.
129. Actual GDP will be below potential GDP
a.
when the economy is at full employment.
b.
during an economic boom.
c.
when resources are fully utilized.
d.
during a recession.
130. During a recession, which of the following will be true?
a.
The actual rate of unemployment will be lower than the natural rate.
b.
Actual GDP will be lower than potential GDP.
c.
The employment/population ratio will increase substantially.
d.
Actual inflation will be higher than was anticipated.
131. Which of the following about unemployment is true?
a.
Frictional unemployment implies a lack of available jobs.
b.
During a recession, cyclical unemployment will be low.
c.
When an economy is at full employment, actual unemployment will be less than the
natural rate of unemployment.
d.
When actual GDP equals potential GDP, the actual unemployment rate will equal the
economy’s natural rate of unemployment.
132. When real GDP grows more slowly than potential GDP,
a.
nominal GDP rises.
b.
the unemployment rate falls.
c.
labor productivity falls.
d.
the unemployment rate rises.
133. Which of the following about potential GDP is true?
a.
During a recession, actual GDP will exceed potential GDP.
b.
Actual GDP cannot exceed potential GDP, even for short periods.
c.
Actual output may be either above or below potential output depending on how fully
resources are utilized.
d.
The economy’s potential output is the maximum output that could be achieved temporarily
during a time of economic boom.
134. Older Americans living on a pension and therefore on a fixed income, tend to be made
a.
better off when prices rise.
b.
better off when the inflation rate rises.
c.
worse off when prices rise.
d.
worse off when prices fall.
135. If borrowers and lenders expect a higher rate of inflation,
a.
nominal interest rates will tend to fall.
b.
real interest rates will tend to fall.
c.
nominal interest rates will tend to rise.
d.
real interest rates will tend to rise.
136. After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing
power. Therefore, it must be true that actual inflation was
a.
greater than expected inflation.
b.
equal to expected inflation.
c.
less than expected inflation.
d.
greater than the nominal rate of interest.
137. During periods when the inflation rate fluctuates widely,
a.
all relative prices increase at the same rate, leaving money prices constant
b.
economic efficiency increases because decision makers pay closer attention to changes in
money prices
c.
uncertainty about changes in relative prices causes a decrease in economic efficiency
d.
all money prices increase at the same rate, leaving relative prices constant
138. The best definition of inflation is
a.
a temporary increase in prices.
b.
an increase in the price of one important commodity such as food.
c.
a persistent increase in the general level of prices as measured by a price index.
d.
an increase in the purchasing power of the dollar.
139. The value of money
a.
remains constant during periods of inflation.
b.
varies inversely with the general price level.
c.
varies directly with the general price level.
d.
varies indirectly with output.
140. Which of the following about inflation is true?
a.
High rates of inflation are usually associated with wide year-to-year changes in inflation.
b.
High rates of inflation are usually associated only with very large countries such as the
United States.
c.
High rates of inflation are usually associated only with smaller countries such as Costa
Rica.
d.
High rates of inflation will generally improve the economic efficiency of an economy.
141. When the inflation rate of a country is high over a lengthy time period,
a.
the year-to-year variability in the rate of inflation is generally small.
b.
the year-to-year variability in the rate of inflation is generally large.
c.
decision makers will be able to forecast future rates of inflation accurately.
d.
there is no reason to believe that the inflation will exert harmful side effects on real output
and the prosperity of the country.
142. Which of the following about inflation is true?
a.
High and variable rates of inflation will be easy for decision makers to forecast accurately.
b.
Unanticipated inflation is an increase in the general level of prices that was not expected
by most decision makers.
c.
In contrast with unanticipated inflation, anticipated inflation implies that the increase in
the general level of prices was expected by borrowers but not lenders.
d.
Inflation will increase the prices of goods and services that households purchase but not
the wage rates of workers.
143. In contrast with unanticipated inflation, anticipated inflation implies that
a.
the government was informed about inflation.
b.
most decision makers expected the general increase in the price level.
c.
the increase in the general level of prices was growth of GDP.
d.
the increase in the general level of prices was expected by borrowers but not lenders.
144. Which of the following about inflation is true?
a.
Anticipated inflation is an increase in the price level that comes as a surprise, at least to
most individuals.
b.
Unanticipated inflation is a change in the price level that is widely expected.
c.
Decision makers are generally able to anticipate slow steady rates of inflation with a fairly
high degree of accuracy.
d.
Inflation will increase the prices of goods and services that households purchase but not
the wage rates of workers.
145. At the beginning of a year, decision makers expect the general level of prices to increase at a 3 percent
annual rate. The CPI increases from 150 to 154.5 during the year; this is an example of
a.
an inflation rate that is equal to 4.5 percent.
b.
an unanticipated increase in the general level of prices.
c.
an increase in the general level of prices that was accurately anticipated.
d.
an inflation rate that is less than what people anticipated.
146. At the beginning of a year, decision makers expect the general level of prices to increase at a 6 percent
annual rate. The CPI increases from 150 to 154.5 during the year; this indicates that
a.
decision makers underestimated the rate of inflation during the year.
b.
decision makers overestimated the rate of inflation during the year.
c.
decision makers accurately forecast the rate of inflation during the year.
d.
the rate of inflation during the year was 4.5 percent.
147. Which of the following is true?
a.
Anticipated inflation is an increase in the price level that comes as a surprise, at least to
most individuals.
b.
Unanticipated inflation is a change in the price level that is widely expected.
c.
When the inflation rate is high and variable, decision makers will generally be able to
anticipate year-to–year changes in inflation quite accurately.
d.
Inflation will tend to increase the nominal values of both prices and wages.
148. A person who argues that inflation “robs us of the purchasing power of our paychecks” should also
consider that inflation
a.
increases the value of the dollar, making paychecks worth more.
b.
will increase the size of paychecks as well as the prices of goods.
c.
does not affect the value of the dollar, either in paychecks or in prices.
d.
only affects the prices of things that we buy, not the prices of things that we sell.
149. Which of the following is a danger of inflation?
a.
Price changes can affect the people who sign long-term contracts.
b.
Rapid price changes reduce uncertainty.
c.
Anticipated inflation may be greater than unanticipated inflation.
d.
High rates of inflation will reduce interest rates.
150. Which of the following is true of high and variable rates of inflation?
a.
When such rates are present, it will be difficult for people to accurately forecast next year’s
rate of inflation.
b.
Inflation of this type will help promote economic growth and the efficient use of
resources.
c.
People will respond to such rates by spending more time producing and less time trying to
protect their wealth and income from the uncertainty created by the inflation.
d.
Inflation of this type will improve the information content delivered by market prices.
151. Which of the following is an example of someone with inflationary expectations taking a step designed
to insulate themselves from the higher expected rates of inflation?
a.
a consumer deciding to delay the purchase of a new home or automobile
b.
a consumer who borrows money at a fixed interest rate in order to purchase a new home or
automobile
c.
an investor who borrows funds at an adjustable money interest rate (one that automatically
increases with higher inflation)
d.
a home buyer who borrows funds at a variable interest rate
152. High and variable rates of inflation will
a.
distort the information delivered by market prices.
b.
encourage people to spend more time producing and less time trying to protect their
wealth.
c.
decrease the risks that accompany the undertaking of long-term investment projects.
d.
promote economic growth and the efficient use of resources.
Figure 8-1
153. In Figure 8-1, the recovery phase of the business cycle can be represented by points:
a.
A.
b.
C.
c.
E.
d.
C to E.
e.
E to G
154. In Figure 8-1, point E represents:
a.
recession and a trough.
b.
peak and a trough.
c.
recession and a peak.
d.
recovery and a peak.
155. In Figure 8-1, the recession phase of the business cycle can be represented by point(s):
a.
CDE.
b.
BCD.
c.
EFG.
d.
A and E.
156. The stages of a business cycle, in order, are
a.
expansion, contraction, recession, and boom.
b.
contraction, recession, expansion, and boom.
c.
boom, expansion, contraction, and recession.
d.
recession, contraction, expansion, and boom.
157. Which of the following will most likely occur during the expansionary phase of a business cycle?
a.
Real GDP declines, and the rate of unemployment increases.
b.
Real GDP declines, and the rate of inflation is unchanged.
c.
Real GDP increases, and rate of unemployment falls.
d.
Real GDP is unchanged, and the rate of inflation is unchanged.
158. During the last several decades the labor force participation rate
a.
of women has increased substantially.
b.
of men has increased substantially.
c.
of women has steadily declined.
d.
of both men and women has steadily declined.
159. If a country’s population (age 16 and over) is 50 million, with 2 million unemployed and 23 million
currently holding jobs, the
a.
unemployment rate is 4 percent, and the labor force participation rate is 46 percent.
b.
unemployment rate is 8.0 percent, and the labor force participation rate is 50 percent.
c.
unemployment rate is 4 percent, and the labor force participation rate is 50 percent.
d.
unemployment rate is 8.7 percent, and the labor force participation rate 50 percent.
160. When workers are unemployed due to a mismatch between their skills and the jobs available,
economists call this
a.
cyclical unemployment.
b.
frictional unemployment.
c.
structural unemployment.
d.
transitional unemployment.
161. Sophia is tending to her home garden while awaiting recall from her seasonal part-time job. The
Bureau of Labor Statistics would classify Sophia as
a.
not in the labor force.
b.
employed.
c.
unemployed.
d.
employed as a household worker.
162. Which of the following is a true statement?
a.
The concept of potential output might be thought of as the maximum sustainable output of
the economy under normal circumstances.
b.
Actual output cannot exceed potential output, even during a boom.
c.
When the actual rate of unemployment exceeds the natural rate, the actual output of the
economy will rise above its potential.
d.
Potential output represents the absolute maximum level of production.
163. Which of the following is a true statement?
a.
Unanticipated inflation is a change in the general level of prices that catches most decision
makers by surprise.
b.
High and variable rates of inflation are easy for decision makers to forecast accurately.
c.
High and variable rates of inflation can increase GDP by reducing investment.
d.
When decision-makers are able to anticipate slow, steady rates of inflation, prices become
more unstable and there is a negative impact on the level of prosperity.
164. If the consumer price index (CPI) was 125 at year-end of 2008 and 132.5 at year-end 2009, inflation
during 2009 was
a.
zero; prices were stable during 2009.
b.
6.0 percent.
c.
7.5 percent.
d.
12.5 percent.
165. Which of the following is a danger of high rates of inflation?
a.
Price changes encourage long-term contracts at the expense of short-term contracts.
b.
Rapid price changes reduce uncertainty.
c.
Inflation increases the real value of assets, such as stocks and bonds.
d.
Inflation will encourage people to spend less time producing and more time trying to
protect the value of their assets.
166. The natural rate of unemployment
a.
is an artificially low rate that cannot be maintained.
b.
is a constant rate that is unaffected by changes in public policy.
c.
is the rate of unemployment present when the economy is operating at full employment.
d.
is equal to the number of persons unemployed divided by the number in the labor force.
167. Which of the following about unemployment is true?
a.
The unemployment rates of the major European economies have been lower than that of
the United States during the last decade.
b.
Compared to the U.S., European labor markets are characterized by less extensive
regulation and less generous unemployment benefits.
c.
High unemployment rates over lengthy time periods are indicative of structural factors that
are adversely affecting the natural rate of unemployment.
d.
The natural rate of unemployment decreases when youthful workers expand as a
proportion of the workforce.
168. Full employment is the rate of employment that results when
a.
all labor resources of an economy are employed.
b.
there is efficient use of the labor force, with allowance made for normal unemployment
due to dynamic changes and the structural conditions of the economy.
c.
cyclical unemployment is between 4 and 5 percent of the labor force.
d.
everybody who wants a job can find one.
169. Cyclical unemployment
a.
is caused by changes in the business cycle.
b.
results from imperfect search activities in matching qualified employees with employers.
c.
results from institutional factors that make it difficult for some workers to find jobs.
d.
will probably go up as a result of improvements in online job searching.
170. Which scenario will most likely happen as employers and employees increase their usage of the
Internet in the job search process?
a.
Job-related information will become more costly and cyclical unemployment will go up.
b.
Job-related information will become less costly and frictional unemployment will go up.
c.
Job-related information will become more costly and structural unemployment will go
down.
d.
Job-related information will become less costly and frictional unemployment will go
down.
ESSAY
171. Answer the following questions:
a.
What are the three types of unemployment, and which two compose the natural rate?
b.
Give an example of a person who would be counted in each type.
c.
Would an economy with 2 percent actual unemployment be in a recession? Why or why not?
composed of the structural and frictional.
an economic boom.
172. A country with a civilian population of 120,000 (all over age 16) has 100,000 employed and 10,000
unemployed persons, of which 5,000 are frictionally unemployed and another 3,000 structurally
unemployed.
a.
What is the size of the labor force?
b.
What is the actual unemployment rate?
c.
What is the labor force participation rate?
d.
What is the employment/population ratio?
e.
What is the natural rate of unemployment?
f.
Is this economy in a recession or a boom? Explain.
173. What is the natural rate of unemployment, and how does it relate to the concept of potential (or
full-employment) GDP?
174. Suppose there are 25,000 employed and 5,000 unemployed persons.
a.
What is the unemployment rate?
b.
If 2,000 of those unemployed became discouraged and quit actively seeking work, what would
happen to the unemployment rate? Calculate the new unemployment rate.
16.67 percent
b.
It would fall to 10.71 percent.
175. Answer the following questions:
a.
What is meant by the term “business cycle”?
b.
What economic indicators would indicate where the economy is in the business cycle? Explain.
a.
110,000
b.
9.09 percent
91.67 percent
d.
83.3 percent
7.3 percent
f.
The economy is in a recession because actual unemployment is above the natural rate.
c.
Give the four phases of the business cycle in their order of occurrence.
d.
What criterion must be met for our economy to be officially in a recession?
176. Discuss the dangers of inflation; that is, why may it hurt an economy?
177. Dr. Smith on the Channel 6 news says, “The recent figures showing that the unemployment rate is
lower this quarter than last quarter are a definite sign that our economy is coming out of the recession.”
Dr. Jones on the Channel 8 news says, “Recent figures showing that employment is lower this quarter
than it was last quarter are a definite sign that our economy is still plunging deeper into the recession.”
a.
Is it possible for both unemployment and employment to fall at the same time? What factor
could account for the observed phenomenon?
b.
In light of your answer, what do you think about the health of the economy relative to last
quarter?
b.
It appears there was a net loss of jobs and that the economy is worse off than it was last quarter.
178. Answer the following questions:
a.
Describe the three types of unemployment.
b.
Explain why economists believe some types of unemployment are efficient and some are not.
Which ones are which?
a.
The business cycle is the periodic increases and decreases of economic aggregates such as real
b.
Unemployment rises during recessions and falls during booms, and real GDP falls during
recessions and rises during booms.
c.
expansion, boom, contraction, recession
d.
two consecutive quarters of negative growth in real GDP
179. Evaluate the economic validity of the following statement: “Unemployed resources would not exist if
the economy were operating efficiently.”
180. Describe two ways that public policy could reduce the natural rate of unemployment.
181. Virtually all economists and policy makers agree that, within limits, higher employment is better. If
this is true, couldn’t the government create more employment by hiring people to dig holes and fill
them in again? Is this good economic policy?
182. Inflation isn’t costly just because prices are going up. After all, inflation means salaries and wages are
going up as well. If higher prices are not the problem, discuss two important aspects of inflation that
are costly.