Chapter 6 Reading

True or false: According to the textbook, Classical economists provide the best easy answers to our macro policy problems.

False Reason: According to the textbook, there are no easy answers to macro policy problems and one must blend both Keynesian and Classical insights to come to reasonable answers about macro policy.

True or false: Before the industrial revolution the problem of cyclical unemployment was much greater than after.

False Reason: Cyclical unemployment was worsened by the industrial revolution as it segmented production.

True or false: Frictional unemployment is generally considered to be government's problem.

False Reason: Frictional unemployment is generally considered to be an individual's problem.

True or false: Business cycles are generally considered within the long-run framework while issues of growth are generally considered within the short-run framework

False Reason: Issues of growth are generally considered in a long-run framework. Business cycles are generally considered in a short-run framework.

True or false: Cyclical unemployment is caused by the institutional structure of the economy while structural unemployment is caused by fluctuations in economic activity.

False Reason: Structural unemployment is caused by the institutional structure of the economy while cyclical unemployment is caused by fluctuations in economic activity.

True or false: The unemployment rate is a purely scientific measure.

False Reason: The concept "unemployment rate" requires subjective judgments and cannot be a purely objective scientific measure.

True or false: In theory, the target rate of unemployment rises during a recession and falls during an expansion.

False Reason: The target rate of unemployment is defined relative to potential output. It doesn't change over a business cycle since potential output is considered to be relatively fixed.

True or false: Macro policy problems fall neatly into either a short-run problem or a long-run problem.

False Reason: While economists' models divide policy problems into short-run and long-run problems, in reality there is significant overlap, which makes the models difficult to apply to the real world.

True or false: Since in the long run we're all dead, policy should focus on short-run problems.

False Reason: While it is true that in the long run we are all dead, our descendants will be alive and will have to live in the world we leave them.

True or false: Keynes believed that although prices and wages did adjust with changes in overall spending, these fluctuations would not bring about aggregate equilibrium.

True Reason: Keynesian economists tended to believe that once it had fallen into a depression and was caught in a cumulative downward cycle, an economy could get out of it on its own in an acceptable period of time.

True or false: The concept "unemployment rate" is a subjective measure but nonetheless should be used in policy analysis.

True Reason: Policy, by nature, is subjective, and requires the use of measures that have subjective elements in them. Good policy analysis does not avoid normative issues; it simply recognizes their subjectivity, and resolves differences through vigorous "devil's advocate" debates, not through scientific debates.

True or false: According to Keynesian economists, the standard measure of unemployment underestimates the unemployment rate.

True Reason: The BLS measure does not include discouraged workers in its measurement of unemployment and hence undercounts unemployment significantly according to Keynesians.

True or false: As potential output rises, the target rate of unemployment will tend to fall.

True Reason: The target rate of unemployment is a long-run concept. It falls during a recession and rises during an expansion.

True or false: According to the textbook there are no easy answers to macro policy problems and one must blend both Keynesian and Classical insights to come to reasonable answers about macro policy.

True Reason: There is enormous nuance in applying models to reality; both Keynesian and Classical models provide important insights.

True or false: Structural unemployment is caused by the institutional structure of an economy or by economic restructuring that makes some skills obsolete.

True Reason: The word "restructuring" is a giveaway that this statement is true.

Which of the follow are key caveats to the definition of potential output? a) It must be sustainable. b) It is not a purely physical measure. c) It must not lead to accelerating inflation. d) It depends on the desired level of interest rates.

a, b, & c

Classical economists are more likely than Keynesian economists to focus more on _____. a) unemployment b) business cycles c) economic growth

c

Classical economists believe that business cycles are temporary glitches and generally favor a) government restrictions on the invisible hand. b) strong labor unions. c) non-activist governmental policy. d) anti-trade restrictions.

c

If a worker is laid off due to cutbacks during a recession, he or she is experiencing _____. a) frictional unemployment b) structural unemployment c) cyclical unemployment d) inflationary unemployment

c

If an economy is experiencing a cyclical downturn and output does not return to the secular growth trend, the economy is said to be experiencing ______. a) a trough b) inflation c) structural stagnation d) a boom

c

If an economy is producing at peak sustainable output without generating accelerating inflation, it can be said to be operating at _____. a) cyclical output b) inflationary output c) potential output d) aggregate output

c

Keynes believed that decreases in aggregate spending could a) easily be corrected by a contraction of the money supply by the Federal Reserve. b) lead to a period of high inflation and low unemployment. c) cause firms to cut production and lay off workers, which further decreases income and spending, leading firms to cut back more, etc. d) not have any lasting long-term economic effects as the market would quickly correct itself.

c

The standard definition of the unemployment rate is a) the ratio of the unemployed to the civilian population. b) the percentage of people in an economy who want to work but cannot find jobs, whether they are looking or not. c) the percentage of people in an economy who are able to and looking for work but cannot find jobs. d) the ratio of the employed to the civilian population.

c

If the labor force is 100 million and the number of people who are unemployed is 8 million, the unemployment rate is _____. a) 4% b) 4.2% c) 8% d) 9.2%

c Reason: Unemployment = unemployed / labor force = 8 million / 100 million = 8%

If the population and output is growing, but population is growing faster than total output, per capita output a) is rising. b) is remaining the same. c) is falling. d) could be rising, falling, or remaining the same.

c Reason: Whether per capita output is rising or falling depends on both the population and economic growth rates. Whether they are rising or falling depends on the relative growth rates.

True or false: Cyclical unemployment is unemployment resulting from fluctuations in economic activity.

True

True or false: Per-capita output is calculated by dividing total output by total population.

True

True or false: Structural stagnation is a cyclical downturn that does not rebound to its secular growth rate without major changes to the structure of the economy.

True

True or false: The U.S. secular growth rate is considered to be approximately 2.5-3.5 percent.

True

True or false: The standard unemployment rate is defined as the number of people in an economy who are able to and looking for work but cannot find jobs as a percent of the labor force.

True

True or false: A business cycle is best defined as economic fluctuations around trend growth.

True Reason: A business cycle is ups and downs of output around its trend.

True or false: Early capitalism's solution to unemployment was fear of hunger.

True Reason: According to early capitalism, if people were unemployed, it was their own fault; hunger, or at least the fear of hunger, and people's desire to maintain their lifestyle would drive them to find other jobs relatively quickly.

True or false: In general, Classical economists believe that the economy will return to its potential output and tend to favor laissez-faire governmental economic policy.

True Reason: Classical economists tend to believe the economy is self-correcting in the long-run.

True or false: Frictional unemployment is consistent with most definitions of full employment.

True Reason: Frictional unemployment can be defined as unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one. Since this flux occurs at potential output, it is consistent with full employment.

True or false: Frictional unemployment can be defined as unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one.

True Reason: Frictional unemployment is unemployment that is natural to a dynamic economy. There is always some level of frictional unemployment.

A business cycle is best defined as a) a short-run temporary upward or downward movement of economic activity or real GDP that occurs around the growth trend. b) a period of high inflation followed by a period of deflation. c) naturally occurring fluctuations in overall firm profits caused by seasonal changes and institutional factors. d) the increase in output due to secular growth trend over a long period of cycles.

a

If GDP increases, we would expect the unemployment to a) Fall b) Remain unchanged c) rise

a

In general, the long-run economic framework deals with issues of a) incentives for supply. b) long-run aggregate demand. c) trade deficits. d) household spending.

a

In terms of government economic policy, in contrast to Keynesian economists, Classical economists generally favor a) a laissez-faire approach. b) a proletariat approach. c) an activist governmental approach. d) a model approach.

a

Suppose a worker finds himself unemployed after his labor and skills are replaced by the work of a machine. He is experiencing _____. a) structural unemployment b) mechanical unemployment c) frictional unemployment d) cyclical unemployment

a

If the population is 200 million and the number of people who are unemployed is 8 million, the unemployment rate is _____. a) cannot be calculated from the available data b) 8% c) 8.2% d) 4%

a Reason: You need to know the labor force to calculate the unemployment rate.

Keynesians are more likely than Classical economists to focus on:. a) unemployment. b) business cycles. c) economic growth.

a & b

The long-term growth rate of an economy is sometimes called the _____. a) inverted growth rate b) secular growth rate c) term growth rate d) true growth rate

b

Which of the following is not included in the BLS measure of the labor force? a) People who are taking time off of work due to an illness. b) People who do not look for a job because they are discouraged. c) People who have been looking for work for 6 months, but haven't found one. d)People who are on vacation from work.

b

Which of the following statements would a Keynesian economist most likely agree with? a) The BLS over-counts unemployment because it includes people who are turning down job offers because they don't pay enough in the labor force. b) The BLS undercounts unemployment because it doesn't include people who aren't looking for work because the transportation costs are prohibitive. c) The BLS undercounts unemployment because it includes people who aren't working because they are striking due to a labor dispute in the labor force. d) The BLS over-counts unemployment because it includes people who are choosing not to work in the labor force.

b

Which person would not be included in the BLS measure of the labor force? a) John who has a part-time job but prefers to work full-time. b) Mike who looked for a job for 4 months and has stopped looking. c) Maria who is on strike due to a labor dispute. d) Alice who is on long-term sick leave from full-time work.

b

If GDP decreases, we would expect the unemployment to a) remain unchanged. b) rise. c) fall.

b Reason: When output falls, fewer people are employed and the unemployment rate tends to rise.

If the economy is operating a) below potential, unemployment is likely below its target rate. b) the rate of unemployment is always at its target rate. c) above potential, unemployment is likely above its target rate. d) above potential, unemployment is likely below its target rate.

d

Target rate of unemployment is a) the rate of unemployment that policy makers believe is responsive to government programs. b) the rate of unemployment that policy makers believe is not responsive to government programs. c) the lowest sustainable rate of unemployment that policy makers believe is achievable in an economic expansion. d) the lowest sustainable rate of unemployment that policy makers believe is achievable given the economy's institutional structure.

d

Which of the following statements would a Classical economist most likely agree with? a) The BLS undercounts unemployment because the BLS doesn't include people who aren't looking for work because they can't find a job that pays enough. b) The BLS overcounts unemployment because it includes people who are on a 2-week annual vacation from a job. c) The BLS undercounts unemployment because the BLS includes people who have been fired from their jobs because of underperformance. d) The BLS overcounts unemployment because it includes people who are looking for work, but are not accepting offers because the pay is too low.

d