Chapter 21Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

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Chapter 21

Introduction to Macroeconomics: Unemployment, Inflation, and
Economic Fluctuations


TRUE/FALSE



1.

Economic growth means a growth in real, per capita total output over time.


ANS:

T

PTS:

1



2.

Individuals, because they may differ considerably
in their evaluation of the relative importance of
certain issues, may disagree about whether certain so
-
called problems are really problems after all.


ANS:

T

PTS:

1



3.

Economic growth is considered to be positive by all individuals.


ANS:

F

PTS:

1



4.

Other things being equal, relatively high rates of unemployment are almost universally viewed as bad.


ANS:

T

PTS:

1



5.

The unemployment rate is the number of people officially unemployed divided by a country’s
population aged 16 or over.


ANS:

F

PTS:

1



6.

The civilian labor force figure excludes those in the armed services, prison, and mental hospitals, as
well homemakers, retirees, and full
-
time students because they are not considered currently available
for employment.


ANS:

T

PTS:

1



7.

By far, th
e worst employment downturn in U.S. history was the Great Depression.


ANS:

T

PTS:

1



8.

Before 1960, variations in unemployment tended to be more pronounced than since 1960.


ANS:

T

PTS:

1



9.

Discouraged workers, who have not actively sought work for f
our weeks, are counted as unemployed.


ANS:

F

PTS:

1



10.

People looking for full
-
time work who grudgingly settle for a part
-
time job are counted as employed,
even though they are only “partly” employed.


ANS:

T

PTS:

1



11.

Some people working in the und
erground economy may be counted in labor statistics as unemployed,
while others may be counted as not in the labor force.


ANS:

T

PTS:

1



12.

Unemployment rates are usually similar across different segments of the population, but they vary
substantially o
ver time.


ANS:

F

PTS:

1



13.

In the short run, a reduction in unemployment may come at the expense of a higher rate of inflation.


ANS:

T

PTS:

1



14.

The duration of unemployment tends to be greater when the amount of unemployment is low and
smaller whe
n the amount of unemployment is high.


ANS:

F

PTS:

1



15.

Unemployment means a loss of potential output.


ANS:

T

PTS:

1



16.

When the baby
-
boom generation began entering the labor force, it raised the labor force participation
rate.


ANS:

T

PTS:

1



17.

Frictional unemployment results from persons being temporarily between jobs.


ANS:

T

PTS:

1



18.

Frictional unemployment, while not good in itself, is a by
-
product of a healthy phenomenon; and
because it is short lived, it is not generally viewed as a ser
ious problem.


ANS:

T

PTS:

1



19.

Structural employment can arise because jobs that require particular skills disappear.


ANS:

T

PTS:

1



20.

Structural unemployment is easily measured and stable over time.


ANS:

F

PTS:

1



21.

Cyclical unemployment may r
esult from an insufficient level of demand for goods and services.


ANS:

T

PTS:

1



22.

Given the volatility and dimensions of unemployment, governments view it as the result of inadequate
demand, which is especially correctable through government policies
.


ANS:

T

PTS:

1



23.

The natural rate of unemployment roughly equals the sum of frictional and cyclical unemployment
when they are at a maximum.


ANS:

F

PTS:

1



24.

When unemployment rises above the natural rate, it reflects the existence of cyclical un
employment.


ANS:

T

PTS:

1



25.

The natural rate of unemployment does not change over time.


ANS:

F

PTS:

1



26.

At the natural rate of unemployment, the economy is producing its potential output.


ANS:

T

PTS:

1



27.

When the economy is experiencing cycl
ical unemployment, the unemployment rate is less than the
natural rate.


ANS:

F

PTS:

1



28.

In both inflation and deflation, a country’s unit of currency changes in purchasing power.


ANS:

T

PTS:

1



29.

Unanticipated and sharp price changes are almost un
iversally considered to be a “bad” thing that needs
to be remedied by some policy.


ANS:

T

PTS:

1



30.

Debtors lose from inflation.


ANS:

F

PTS:

1



31.

Wage earners will lose from inflation if wages rise at a slower rate than the price level.


ANS:

T

PTS
:

1



32.

Uncertainty about inflation can increase long
-
term interest rates by adding an inflation risk premium.


ANS:

T

PTS:

1



33.

Inflation brings about changes in real incomes of persons.


ANS:

T

PTS:

1



34.

Menu costs and shoe
-
leather costs are mode
st, regardless of the rate of inflation.


ANS:

F

PTS:

1



35.

The real interest rate equals the nominal interest rate plus the inflation rate.


ANS:

F

PTS:

1



36.

When the inflation rate exceeds the nominal interest rate, real interest rates are negative.


ANS:

T

PTS:

1



37.

As long as nominal interest rates cannot be negative, real interest rates cannot be negative.


ANS:

F

PTS:

1



38.

If people correctly anticipate inflation, they will behave in a manner that will largely protect them
against loss.


AN
S:

T

PTS:

1



39.

When people start expecting future inflation, creditors become less willing to lend funds at any given
interest rate because they fear they will be repaid in dollars of lesser value than those they loaned.


ANS:

T

PTS:

1



40.

When borrow
ers of funds start expecting future inflation, the demand for funds decreases.


ANS:

F

PTS:

1



41.

When both suppliers and demanders of funds begin to expect inflation, it will push up the interest rate
to a new, higher equilibrium level.


ANS:

T

PTS:

1



42.

In periods of high unexpected inflation, the nominal interest rate can be high while the real interest rate
is low or even negative.


ANS:

T

PTS:

1



43.

In a growing economy, real GDP will tend to rise from one business cycle peak to the next.


ANS:

T

PTS:

1



44.

In an expansion, investment is rising, but expenditures for expensive durable consumer goods are
falling.


ANS:

F

PTS:

1



45.

A contraction is a period of falling real output and is usually accompanied by rising unemployment
and declining b
usiness and consumer confidence.


ANS:

T

PTS:

1



46.

Unemployment falls substantially as soon as the economy enters the expansion phase of the business
cycle.


ANS:

F

PTS:

1



47.

The lengths of business cycles are not uniform.


ANS:

T

PTS:

1



48.

The pe
rformance of the economy and the fate of an incumbent’s bid for reelection show a strong
correlation.


ANS:

T

PTS:

1



49.

Econometric forecasts are generally highly accurate.


ANS:

F

PTS:

1



50.

Since the development of the index of leading economic indi
cators, it has never failed to give some
warning of an economic downturn.


ANS:

T

PTS:

1



51.

The lead time between a change in the index of economic indicators and changes in business
conditions has varied widely.


ANS:

T

PTS:

1


MULTIPLE CHOICE



1.

Whi
ch is
not
one of society’s major economic goals?

a.

maintaining employment at high levels

b.

maintaining prices at a stable level

c.

maintaining a high rate of economic growth

d.

All of the above are major economic goals of society.



ANS:

D

PTS:

1



2
.

The three major macroeconomic goals of nearly every society are

a.

maintaining stable prices, reducing interest rates, and achieving a high rate of economic
growth.

b.

maintaining high levels of employment, increasing the supply of money, and achieving
a
high rate of economic growth.

c.

maintaining stable prices, maintaining high levels of employment, and achieving high
rates of economic growth.

d.

achieving high rates of economic growth, reducing unemployment, and reducing interest
rates.



ANS:

C

PT
S:

1



3.

With regard to macroeconomic goals, which is
not
true?

a.

Individuals differ considerably in their evaluation of the relative importance of certain
issues.

b.

Individuals disagree on whether certain “problems” are really problems.



si牴ually
eve特one views economic g牯wth positively.



pome individuals disag牥e about the app牯p物ate dist物bution o映income.



All o映the above a牥 t牵e.



ANS:

C

PTS:

1



4.

Economic growth is measured by changes in

a.

nominal GDP.

b.

the money supply.

c.

real GDP per capita.

d.

the rate of unemployment.

e.

none of the above.



ANS:

C

PTS:

1



5.

High rates of unemployment

a.

can lead to increased tensions and despair.

b.

result in the loss of some potential output in society.

c.

reduce the possible le
vel of consumption in society.

d.

represent a loss of efficiency in society.

e.

All of the above are true.



ANS:

E

PTS:

1



6.

The unemployment rate is the number of people officially unemployed divided by

a.

the civilian labor force.

b.

the noninstit
utional population.

c.

the total population.

d.

the number of people employed.

e.

none of the above.



ANS:

A

PTS:

1



7.

The labor force consists of

a.

discouraged workers, employed workers, and those actively seeking work.

b.

all persons over the ag
e of 16 who are working or actively seeking work.

c.

all persons over the age of 16 who are able to work.

d.

all persons over the age of 16 who are working, plus those not working.

e.

discouraged workers, part
-
time workers, and full
-
time workers.



ANS
:

B

PTS:

1



8.

The civilian labor force includes which of the following groups?

a.

those in the armed forces

b.

those who are currently working part time

c.

full
-
time students

d.

retirees

e.

all of the above



ANS:

B

PTS:

1



9.

Discouraged workers

a
.

are considered unemployed.

b.

are considered as not in the labor force.

c.

are considered as in the labor force.

d.

are considered as both unemployed and in the labor force.

e.

are considered as unemployed but not in the labor force.



ANS:

B

PTS:

1



10.

Which of these groups tends to have the lowest unemployment rate?

a.

teenagers

b.

those with some college education

c.

college graduates

d.

those with a high school diploma but no college experience



ANS:

C

PTS:

1



11.

The largest fraction of
those counted as unemployed is due to

a.

job losers.

b.

job leavers.

c.

new entrants.

d.

reentrants.



ANS:

A

PTS:

1



12.

In Littletown, the population includes 1,000 people over the age of 16; 800 are in the labor force, and
600 are employed. The une
mployment rate is

a.

33 percent.

b.

25 percent.

c.

20 percent.

d.

75 percent.

e.

none of the above.



ANS:

B

PTS:

1



13.

The official unemployment rate may overstate the extent of unemployment because

a.

it excludes discouraged workers.

b.

it counts

part
-
time workers as fully employed.

c.

it does not count those with jobs in the underground economy as employed.

d.

it includes those who claim to be looking for work as unemployed, even if they are just
going through the motions in order to get govern
ment benefits.

e.

of both c and d.



ANS:

E

PTS:

1



14.

The unemployment rate may underestimate the true extent of unemployment if

a.

employees increase the number of hours they work overtime.

b.

many people become discouraged and cease looking for wor
k.

c.

a large number of people are working in the underground economy.

d.

any of the above occur.



ANS:

B

PTS:

1



15.

If unemployment benefits increase, leading more people to claim to be seeking work when they are not
really seeking work, the measure
d unemployment rate will

a.

rise.

b.

fall.

c.

be unaffected.

d.

change in an indeterminate direction.



ANS:

A

PTS:

1



16.

After looking for a job for more than eight months, Kyle became frustrated and stopped looking.
Economists view Kyle as

a.

unemp
loyed.

b.

part of the labor force, but neither employed nor unemployed.

c.

a discouraged worker.

d.

cyclically unemployed.

e.

both b and c.



ANS:

C

PTS:

1



17.

Persons who do not have jobs and who do not look for work are considered

a.

unemployed.

b.

out of the labor force.

c.

underemployed.

d.

overemployed.

e.

part of the underground economy.



ANS:

B

PTS:

1



18.

If the unemployment rate is 6 percent and the number of persons unemployed is 6 million, the number
of people employed is equal to

a
.

100 million.

b.

94 million.

c.

106 million.

d.

6 million.

e.

none of the above.



ANS:

B

PTS:

1



19.

According to the Bureau of Labor Statistics, the four main categories of unemployed workers are

a.

discouraged workers, part
-
time workers, the cycl
ically unemployed, and the frictionally
unemployed.

b.

discouraged workers, job losers, new entrants, and the underemployed.

c.

new entrants, job losers, job leavers, and reentrants.

d.

job losers, job leavers, the structurally unemployed, and the frict
ionally unemployed.



ANS:

C

PTS:

1



20.

Frictional unemployment is

a.

unemployment that is due to normal turnover in the labor market.

b.

unemployment caused by automation in the workplace.

c.

unemployment caused by lack of training and education.

d.

unemployment that is due to the friction of competing ideological systems.

e.

all of the above.



ANS:

A

PTS:

1



21.

Unemployment caused by a contraction in the economy is called

a.

frictional unemployment.

b.

cyclical unemployment.

c.

structural une
mployment.

d.

seasonal unemployment.



ANS:

B

PTS:

1



22.

A federal program aimed at retraining the unemployed workers of the declining auto and steel
industries is designed to reduce which type of unemployment?

a.

seasonal

b.

cyclical

c.

structural

d.

frictional



ANS:

C

PTS:

1



23.

When unemployment rises above the natural rate, it reflects the existence of ____ unemployment.

a.

frictional

b.

structural

c.

seasonal

d.

cyclical



ANS:

D

PTS:

1



24.

When an economy is operating at full employme
nt,

a.

the unemployment rate will equal zero.

b.

frictional unemployment will equal zero.

c.

cyclical unemployment will equal zero.

d.

structural unemployment will equal zero.

e.

both b and d are correct.



ANS:

C

PTS:

1



25.

The natural rate of unem
ployment would increase when which of the following increases?

a.

frictional unemployment

b.

structural unemployment

c.

cyclical unemployment

d.

any of the above

e.

either frictional or structural unemployment



ANS:

E

PTS:

1



26.

If a nation’s labor

force receives a significant influx of young workers,

a.

the natural rate of unemployment is likely to increase.

b.

the natural rate of unemployment is likely to decrease.

c.

the natural rate of unemployment is unlikely to change.

d.

frictional unemplo
yment will likely decrease to zero.



ANS:

A

PTS:

1



27.

Which of the following is false?

a.

At the natural rate of unemployment, the economy is considered to be at full employment.

b.

At full employment, the economy is producing at its potential output
.

c.

If unemployment is greater than its natural rate, the economy is producing at greater than
its potential output.

d.

If we are at less than full employment, some cyclical unemployment exists.



ANS:

C

PTS:

1



28.

When would consumers and producers
experience increased difficulty in coordinating their plans and
decisions?

a.

in a period of inflation

b.

in a period of deflation

c.

in a period of either inflation or deflation

d.

none of the above



ANS:

C

PTS:

1



29.

Inflation can harm

a.

retirees

on fixed pensions.

b.

borrowers who have long
-
term fixed interest rate loans.

c.

wage earners whose incomes grow slower than inflation.

d.

either a or c.

e.

all of the above.



ANS:

E

PTS:

1



30.

Inflation will be least harmful if

a.

interest rates
are not adjusted accordingly when inflation occurs.

b.

worker wages are set by long
-
term contracts.

c.

it is correctly anticipated and interest rates adjust accordingly.

d.

it is not fully anticipated.



ANS:

C

PTS:

1



31.

Unexpected inflation general
ly benefits

a.

lenders.

b.

borrowers.

c.

the poor.

d.

people on fixed incomes.



ANS:

B

PTS:

1



32.

The costs of inflation include

a.

menu costs.

b.

shoe
-
leather costs.

c.

a distortion of price signals.

d.

all of the above.



ANS:

D

PTS:

1



33.

I
f the nominal interest rate is 9 percent and the inflation rate is 3 percent, the real interest rate is

a.

3 percent.

b.

6 percent.

c.

9 percent.

d.

12 percent.

e.

27 percent.



ANS:

B

PTS:

1



34.

What is the real interest rate paid on a loan bearing

7 percent nominal interest per year if the inflation
rate is 6 percent?

a.

13 percent

b.

7 percent

c.

6 percent

d.

1 percent



ANS:

D

PTS:

1



35.

If people correctly anticipate inflation, it will

a.

benefit borrowers.

b.

benefit lenders.

c.

benefit

neither borrowers nor lenders.

d.

harm both borrowers and lenders.



ANS:

C

PTS:

1



36.

An increase in the expected future rate of inflation will lead to

a.

an increase in the supply of funds.

b.

a decrease in the supply of funds.

c.

an increase in t
he demand for funds.

d.

a decrease in the demand for funds.

e.

both b and d.



ANS:

A

PTS:

1



37.

A business cycle reflects changes in economic activity, particularly real GDP. The stages of a business
cycle in order are

a.

expansion, peak, contraction
, and trough.

b.

expansion, trough, contraction, and peak.

c.

contraction, recession, expansion, and boom.

d.

trough, expansion, contraction, and peak.



ANS:

A

PTS:

1



38.

In the contraction phase of the business cycle,

a.

output is rising.

b.

unemp
loyment is falling.

c.

consumer and business confidence are high.

d.

investment is rising.

e.

none of the above is true.



ANS:

E

PTS:

1



39.

The contractionary phase of the business cycle is characterized by

a.

reduced output and increased unemployme
nt.

b.

reduced output and reduced unemployment.

c.

increased output and increased unemployment.

d.

increased output and reduced unemployment.



ANS:

A

PTS:

1


PROBLEM



1.

Answer the following questions about unemployment:

a.

If a country has a noninst
itutional population of 200 million and a labor force of 160
million, and 140 million people were employed, what is its labor force participation rate
and its unemployment rate?

b.

If 10 million new jobs were created in the country, and it attracted 20 mi
llion of the
people previously not in the labor force into the labor force, what would the new labor
force participation rate and new unemployment rate be?

c.

Beginning with the situation in part (a), if 10 million unemployed people became
discouraged and

stopped looking for work, what would the new labor force participation
rate and new unemployment rate be?

d.

Beginning with the situation in part (a), if 10 million current workers retired but their
jobs were filled by others still in the labor force, wh
at would the new labor force
participation rate and new unemployment rate be?



ANS:


a.

Its labor force participation rate is 80 percent (160 million
÷

200 million) and its
unemployment rate is 12.5 percent (20 million
÷

160 million).

b.

Its labor force

participation rate would be 90 percent (180 million
÷

200 million) and its
unemployment rate would be 16.7 percent (30 million
÷

150 million).

c.

Its labor force participation rate would be 75 percent (150 million
÷

200 million) and its
unemployment rate
would be 6.7 percent (10 million
÷

150 million).

d.

Its labor force participation rate would be 7.5 percent (150 million
÷

200 million) and its
unemployment rate would be 16.7 percent (30 million
÷

150 million).



PTS:

1



2.

Which of the following indiv
iduals would economists consider unemployed?

a.

Sam looked for work for several weeks but has now given up his search and is going
back to college.

b.

A 14
-
year
-
old wants to mow lawns for extra cash but is unable to find neighbors willing
to hire her.

c.

A factory worker is temporarily laid off but expects to be called back to work soon.

d.

A receptionist, who works only 20 hours per week, would like to work 40 hours per
week.

e.

A high school graduate is spending the summer backpacking across the count
ry rather
than seeking work.



ANS:


a.

Sam is a discouraged worker who is not actively seeking work, and therefore not
considered unemployed.

b.

The fourteen year old is under 16 years of age and not considered part of the labor
force. Therefore he cann
ot be officially unemployed.

c.

The only person an economist would consider officially unemployed.

d.

The receptionist is considered employed, even though she would like to work more
hours each week.

e.

The receptionist is considered employed, even thou
gh she would like to work more
hours each week.



PTS:

1



3.

Identify whether each of the following reflects seasonal, structural, frictional, or cyclical
unemployment.

a.

A sales employee is laid off due to slow business after consumer spending falls.

b.

An automotive worker is replaced by robotic equipment on the assembly line

c.

A salesperson quits a job in California and seeks a new sales position after moving to
New York

d.

An employee is fired due to poor job performance and searches the want ads

each day
for work



ANS:


a. Cyclical

b. Structural

c. Frictional

d. Frictional


PTS:

1



4.

Answer the following questions about reasons for unemployment:

a.

In a severe recession, what would tend to happen to the number of people in each of the
fol
lowing categories?

job losers


job leavers


reentrants


new entrants


b.

In good economic times, why might the number of job leavers, reentrants, and new
entrants all increase?



ANS:


a.

job losers

increase

job leavers

decrease

reentrants

decrea
se

new entrants

decrease



b.

Good job prospects would tend to increase the number of job leavers by making them
confident they could find better jobs; good job prospects would also attract reentrants
(e.g., homeowners or retirees) and new entrants (e.g
., students who would leave school
if offered a good enough job).



PTS:

1



5.

Unemployment benefits in many European countries tend to be both more generous and available for
longer periods than those in the United States. What impact do you think this
is likely to have on the
unemployment rate in a European country? Why?


ANS:


There is less incentive to find new employment once unemployed in Europe than in the United States
due to the more generous European unemployment benefits. As a result, the unemp
loyment rate in
Europe is on average higher than in the United States.


PTS:

1



6.

How can unions result in higher unemployment rates? How would the results differ for someone who
wants to be employed in the union sector as compared with someone who curre
ntly has a job in the
union sector?


ANS:


If union bargaining raises the union wage above the equilibrium level, the quantity of unionized labor
demanded will decrease and the quantity of unionized labor supplied will increase. Some union
workers will be
unemployed as a result and will either seek nonunion work or wait to be rehired in the
union sector. Union workers that are still employed are better off due to their higher earnings.


PTS:

1



7.

Answer the following questions about inflation:

a.
What wo
uld be the effect of unexpected inflation on each of the following?

retirees on fixed incomes


workers


debtors


creditors


shoe
-
leather costs


menu costs


b.
How would your answers change if the inflation was expected?


ANS:


a.

retirees on fixed

incomes

hurt

workers

hurt (unless wages kept up with inflation)

debtors

help

creditors

hurt

shoe
-
leather costs

increase

menu costs

increase


b.

Workers, debtors, and creditors would be unaffected. If retirees stayed on their fixed
incomes, they wou
ld be hurt. Shoe
-
leather costs would be unaffected but menu costs
would rise.



PTS:

1



8.

Answer the following questions about the nominal and real interest rates:

a.

What would be the real interest rate if the nominal interest rate were 14 percent and
the
inflation rate were 10 percent? If the nominal interest rate were 8 percent and the
inflation rate were 1 percent?

b.

What would happen to the real interest rate if the nominal interest rate went from 9
percent to 15 percent when the inflation rate w
ent from 3 percent to 10 percent? If the
nominal interest rate went from 11 percent to 7 percent when the inflation rate went
from 8 percent to 4 percent?



ANS:


a. 4 percent; 7 percent

b. Nothing; it would remain at 3 percent


PTS:

1



9.

You borrow m
oney at a fixed rate of interest to finance your college education. If the rate of inflation
unexpectedly slows down between the time you take out the loan and the time you begin paying it
back, is there a redistribution of income? Do you gain or lose? Wha
t if you already expected the
inflation rate to slow at the time you took out the loan? Explain.


ANS:


If the slowing of the rate of inflation is unexpected, then there is a redistribution of income from
borrowers such as yourself to lenders (assuming the

borrowers do not default on their loans as a
result). If the slowing of the rate of inflation is fully anticipated at the time the loan is taken out, then
there is no redistribution of income associated with the student loan.


PTS:

1



10.

How does an adj
ustable rate mortgage agreement protect lenders against inflation? Who bears the
inflation risk?


ANS:


An adjustable rate mortgage protects lenders against inflation by guaranteeing lenders a particular real
rate of interest. An adjustable rate mortgage s
hifts the risk of inflation from the lenders to the
borrowers. If the rate of inflation increases (decreases), the interest paid by borrowers will increase
(decrease) accordingly.


PTS:

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11.

In 2000, a proposal was made in Santa Monica, California, to r
aise the minimum wage in the hotel and
shopping district to a “living” wage of $10.69 per hour. Predict the effect of such legislation on
unemployment in the hotel and shopping industries in Santa Monica. What would you expect to
happen to the unemployment

rate in neighboring areas?


ANS:


It is likely that such legislation would result in greater unemployment in that particular district's hotel
and shopping industry. An increase in the minimum wage both increases the quantity of labor supplied
and decrease
s the quantity of labor demanded.


PTS:

1