Economics exam 2 (05a-08)

Which of the following are considered sources of bias in the CPI?

quality changes Improvements in product quality creates problems with respect to the accuracy of measuring inflation. Thus, if the price index leaves out new better quality goods, it overlooks one of the ways in which the cost of living is improving.

Which of the following graphs most likely illustrated the aggregate demand curve

C-upward curve at price level and going down at real GDP Aggregate demand (AD) slopes down, showing that, as the price level rises, the amount of total spending on domestic goods and services declines.

Which of the following graphs most likely illustrates aggregate supply:

D- low at price level, high at real GDP The aggregate supply curve is an upward sloping curve. As the price level increases, Real GDP increases to form the the upward sloping aggregate supply curve.

Which of the following graphs most likely illustrates the aggregate supply curve in it's intermediate range

D-low left, high right In the AS curve's intermediate area, a higher price level for outputs continues to encourage a greater quantity of output -- therefore we will see an upwardly sloping AS curve.

If there is an increase in budget deficits by 1% of GDP and the initial interest rate is 5%, the long-term interest rate will be between 5.5% and what?

6% A consensus estimate based on a number of studies is that an increase in budget deficits (or a fall in budget surplus) by 1% of GDP will cause an increase of 0.5-1.0% in the long-term interest rate. Therefore, if initial interest rate is 5%, the long-term interest rate will be between 5.5% and 6%.

Show what happens in the economy when the government decreases its spending.

AD shifts left

The Consumer Price Index (CPI) is a weighted average of the prices of all goods and services that are available in the U.S. economy.

False

True or false? In practice, the estate tax applies to all people who leave inheritances to their beneficiaries, no matter how large or small.

False

Which of the following is an example of barter?

Marlene fixes Jack's bicycle and in exchange he gives her a cheesecake he's made.

Which of the following are true about permanent tax cuts?

People will likely respond more strongly to permanent changes. Most people and firms will react more strongly to a permanent policy change than a temporary one.

Which of the functions of money allow individuals to buy goods today and pay for them at a future date?

Standard of deferred payment.

True or false? Following an uptick of productivity in the U.S. economy, the U.S. AS curve will shift to the right.

True

Which of the following is an example of a social value-based regulation that can impose a barrier between some willing workers and other willing employers?

a local government not allowing liquor stores be open on Sundays Sometimes government regulations are enacted for their social value, like a local government not allowing liquor businesses to open on Sundays. Whatever defenses may be offered for such laws in terms of social value—like the value some Christians place on not working on Sunday, or Orthodox Jews or highly observant Muslims on Saturday—these kinds of restrictions impose a barrier between some willing workers and other willing employers, and thus contribute to a higher natural rate of unemployment.

If aggregate demand in the economy has soared so high that firms in the economy are not capable of producing additional goods, because labor and physical capital are fully employed, then __________.

additional increases in aggregate demand can only result in a rise in the price level

What term is best defined as an institution that conducts a nation's monetary policy and regulates its banking system?

central bank A central bank is an institution that conducts a nation's monetary policy and regulates its banking system.

Excess money holding will __________ the money multiplier.

decrease

When individuals choose to hold excess money, the money multiplier will ________.

decrease

What is the most important bank regulation, from the customer's point of view?

deposit insurance

Tax policy is the only fiscal policy tool available to influence the path of the economy over time.

false Fiscal policy is the use of government spending and tax policy to influence the path of the economy over time. Therefore, both government spending and tax policy are considered fiscal policy tools.

Fiscal policy is the use of ____________________ and tax policy to influence the path of the economy over time.

government spending

The components with the highest weights in the Consumer Price Index are _____________.

housing, and food and beverage Of the eight categories used to generate the Consumer Price Index, housing is the highest at 42.7%. The next highest category, food and beverage at 15.3%, is less than half the size of housing. Other goods and services, and apparel, are the lowest at 3.4% and 3.3%, respectively.

When the government passes a bill it takes time for the bill to take effect. This is because of?

implementation lag

Deflation is a time when the buying power of money in terms of goods and services _____________.

increases

What is the short-run quantity of labor demanded and the wage rate for the economy in the figure below? Note the economic contraction from D0 to D1.

quantity of labor demanded= 15 wage= $15 Because wages are sticky downward, they do not adjust toward what would have been the new equilibrium wage ($10), at least not in the short run. Instead, after the shift in the labor demand curve, the same quantity of workers is willing to work at that wage, $15, as before; however, the quantity of workers demanded at that wage has declined from the original equilibrium (25 to 15.)

07a Which of the following is a tax in which people with higher incomes pay a smaller share of their income in tax?

regressive tax A regressive tax is a tax in which people with higher incomes pay a smaller share of their income in tax.

Consider a family buys a new home with a home loan of $125,000 at a fixed interest rate of 7%. If inflation increases from 5% to 7%, how will this impact the real interest rate the individual will be paying?

the home loan must be repaid at a real interest rate of zero The home loan's fixed interest rate of 7% will subtract the new inflation rate of 7% and the loan must be repaid at a real interest rate of zero. (7%−7%=0%)

American households become more confident about American vehicles; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

AD right shift

Which point on Figure 1 below represents equilibrium in the labor market?

Point B Equilibrium in the labor market occurs where quantity supplied is equal to quantity demanded, or at the point where the supply and demand curves intersect with each other. Looking at Figure 1 above equilibrium occurs at point B.

Suppose, in the nation of Xurbia, the cost of electricity increases; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

Shift left An increase in the price of inputs, in this case electricity, will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will dampen the possibilities for earning profits.

06a Use the aggregate supply (AS) curve and aggregate demand (AD) curve below to determine the equilibrium price level and equilibrium real GDP for this economy.

The intersection of the aggregate supply and aggregate demand curves shows the equilibrium level of real GDP and the equilibrium price level in the economy. In this, the equilibrium price level is 150 and equilibrium Real GDP is $8000

08 If banks begin holding excess reserves, how will this affect the money multiplier?

The money multiplier will decrease.

Automatic stabilizers are programs that are already laws that stimulate aggregate demand in a recession and hold down aggregate demand in a potentially inflationary boom.

true

The table below describes the market for nurses. Quantity Demanded and Quantity Supplied for Nurses Wage per hour $20;$30;$40;$50;$60 Quantity demanded per day 50,000;40,000;30,000;20,000;10,000 Quantity supplied per day 10,000;20,000;30,000;40,000;50,000

$40 The equilibrium hourly wage occurs where quantity demanded is equal to quantity supplied. In this case, equilibrium wage is $40 and the equilibrium quantity is 30,000 nurses.

The table below shows the total expenditure on a basket of goods and services in six consecutive years. Use this information to calculate the inflation rate since the previous year for 2013 and 2015, and enter your answers in that order. (Round each answer to two decimal places.)

(Expenditure in new year - Expenditure in previous year)/Expenditure in previous year×100=Inflation rate 73,987−56,738/56,738×100≈30.40% 119,407−88,733/88,733×100≈34.57%

If a person has money in a bank account that pays 4% interest, but inflation rises to 5%, then the real rate of return for the money invested in that bank account is ___________.

-1% The real interest rate isolates the effect of inflation, therefore the real interest rate is the nominal interest rate minus the inflation rate. So if a person has money in a bank account that pays 4% interest, but inflation rises to 5%, then the real rate of return for the money invested in that bank account is −1%.

Consider a worker who plans to retire and live on a fixed payment pension. How would an increase in inflation above expectation affect the worker's purchasing power in retirement?

1. as inflation rises, the buying power of the fixed pension plan will not be able to keep up 2. if the same fixed income is earned in 1990 as it was in 1980, inflation will have dramatically increased living expenses and it will be difficult to maintain the same purchasing power

First Bank has $12 million in deposits, $5 million in loans, $6 million in bonds and $1 million in reserves. What is the bank's net worth?

A bank's net worth is calculated by subtracting liabilities from assets: Net Worth=Assets−Liabilities Assets=$5 million+$6 million+$1 million=$12million Liabilities=$12 million Net Worth=$12 million−$12 million=$0 million

Sam Bank has $4 million in reserves, $11 million in deposits, $4 million in bonds and $15 million in loans. What is the bank's net worth?

A bank's net worth is calculated by subtracting liabilities from assets: Net Worth=Assets−Liabilities Assets=$4 million+$4 million+$15 million=$23million Liabilities=$11 million Net Worth=$23 million−$11 million=$12 million

Which of the following is the correct definition of a budget deficit?

A budget deficit is a financial situation in which the federal government spends more money than it receives in taxes in a given year.

If the federal government spends $1.4 trillion more dollars than it collects in tax revenue, what occurs?

A budget deficit. A budget deficit is when the federal government spends more money than it receives in taxes in a given year.

Which of the following is a responsibility of a central bank?

A central bank determines whether to raise or lower interest rates. A central bank implements monetary policy. The Federal Reserve, like most central banks, is designed to perform three important functions: 1. conduct monetary policy 2. promote stability of the financial system and 3. provide banking services to commercial banks and other depository institutions, and to the federal government.

Which of the following graphs most likely illustrates aggregate demand

A-high at price level, low at Real GDP Aggregate demand (AD) slopes down, showing that, as the price level rises, the amount of total spending on domestic goods and services declines.

Suppose Canadian households become less optimistic about the Canadian economy; illustrate the effect of this on the Canadian economy by shifting the aggregate demand (AD) curve in the appropriate direction.

AD left shift An decrease in consumer confidence shifts AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

Suppose foreigners become less confident about products made in America; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

AD left shift An decrease in consumer confidence shifts AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

Suppose, in order to support an increase in demand for health services for an aging population, the Norwegian government increases the tax burden for Norwegian households. Use the graph below to show the impact of the aforementioned on the Norwegian economy by shifting the appropriate curve(s).

AD left shift Higher tax rates for households will decrease consumption spending - a component of AD - which will shift the AD curve to the left

Suppose, after years of government surpluses, the government decides to increase government spending within the domestic economy. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s).

AD right shift Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right

Suppose, the government reduces business taxes significantly. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s).

AD right shift Lower tax rates for corporations or tax reductions will cause a change in Investment spending - a component of AD - which will shift the AD curve to the right.

Illustrate how the aggregate demand curve shifts after the government increases business taxes.

AD shifts left

Show what happens in this economy when the government reduces after-tax profits by raising business taxes.

AD shifts left

Show what happens to the aggregate demand curve when the government decides to reduce its spending on roads and bridges.

AD shifts left

Illustrate what happens to the aggregate demand curve during expansionary fiscal policy.

AD shifts right

Illustrate what happens to the aggregate demand curve when the government increases its purchases.

AD shifts right

By moving the aggregate demand curve, show how increased government spending impacts the economy.

AD shifts right Increased government spending is a form of expansionary fiscal policy, which increases levels of output and shifts the aggregate demand curve to the right.

Illustrate what happens to the aggregate demand curve when the government raises its spending on defense and education.

AD shifts right The increase in defense and education spending represents expansionary fiscal policy through increases in government spending. Expansionary fiscal policy increases the level of aggregate demand, thus, shifting it to the right. Both equilibrium price and real GDP increase.

Which of the following is a benefit of banks?

All of the above.

What is an "excise tax"?

An excise tax is a tax on specific goods, usually gasoline, tobacco, and alcohol.

With a economic expansion from D0 to D1 seen on the figure below, what will be the new quantity of labor demanded for this economy?

As the economy expands more labor is demanded from D0 to D1 due to an increase in output. The new demand curve D1 intersects with supply, S, at 20 laborers (Q). This is the new quantity of labor demanded.

Which of the following components are used to calculate M1? Select all that apply.

Currency Traveler's checks M1 money supply includes those monies that are very liquid such as cash, checkable (demand) deposits, and traveler's checks.

True or false? Permanent tax cuts cannot be changed in the future.

False Permanent tax cuts are expected to stay in place for the foreseeable future, but they can be undone/changed at a later date.

True or false? Relatively high levels of cyclical unemployment for an economy occur when the level of output is close to potential GDP.

False Relatively low cyclical unemployment for an economy occurs when the level of output is close to potential GDP. Conversely, high cyclical unemployment arises when the output is substantially to the left of potential GDP on the AD/AS diagram.

True or False? Stagflation refers to a stagnant or contracting real GDP in the presence of deflation.

False This is actually a recession. A stagnant - or stagnating (i.e. contracting) economy with high unemployment and high inflation is nicknamed stagflation.

True or false? An increase in excess reserves will result in an increase in the money multiplier.

False The money multiplier will depend on the proportion of reserves that the Federal Reserve Band requires banks to hold. Additionally, a bank can also choose to hold extra reserves. Remember, the formula for money multiplier is change in money supply divided by excess reserves. As excess reserves grow, the money multiplier will shrink. The more money the bank chooses to hold, the less money they are earning.

Which of the following is the best reason why the arrival of new goods creates problems with respect to the accuracy of measuring inflation?

If the price index leaves out new goods, it overlooks one of the ways in which the cost of living is improving.

If the required reserve ratio for a bank is 0.05, and banks lend out all excess reserves, what is the money multiplier (MM)?

In a multi-bank system, institutions determine the amount of money that the system can create by using the money multiplier (MM). This tells us by how many times a loan will be "multiplied" as it is spent in the economy and then re-deposited in other banks. The money multiplier formula is MM=1/RR, where RR is the required reserve ratio (RR). In this case, since RR=0.05, MM=1/0.05=20.

The table below shows the components of M1 and M2 in the U.S. Use the table to calculate Total M2. Round to the third decimal place.

In order to calculate M2, first calculate M1. M1 money supply is composed of coins and currency in circulation, checkable deposits, and traveler's checks. To calculate M1, add currency, traveler's checks, and demand deposits together. which is equal to $3,408 trillion. M2 money supply is composed of M1, savings deposits, money market funds, certificates of deposit, and other time deposits. To calculate M2, add M1, savings accounts, time deposits, and mutual market fund balances, which is equal to $14.916 trillion.

A recession recently hit Country Y. The shift in demand for labor due to this recession can be seen from D0 to D1. Since wages remain sticky in the short-run how many people will be unemployed in the short-run due to this shift?

In the short-run wages are sticky or remain the same, however the quantity of labor demanded changes and moves to curve D1. Looking at the graph the equilibrium wage along D0 is $30 and the equilibrium quantity of labor demanded is 25. The wage will remain the same with the initial downturn of the economy but the labor demanded will decrease with the shift onto D1 from 25 to 15. Therefore the number of people unemployed is 10.

Suppose the Fed is worried about the inflationary potential of the economy and acts to slow it down by selling government bonds. What is the most likely outcome?

Interest rates rise and money supply contracts.

Which of the following is true about the aggregate supply curve?

It illustrates real GDP for each price level. The aggregate supply (AS) curve shows the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level.

Which of the following is true about core inflation?

It is a measure of inflation that excludes the rate of price increases for certain volatile components in price indexes. Economists typically calculate a core inflation index by taking the CPI and excluding volatile economic variables. In this way, economists have a better sense of the underlying trends in prices that affect the cost of living. Examples of excluded variables include energy and food prices, which can jump around from month to month because of the weather.

The shape of the short-run aggregate supply curve is determined by

None of the above The wealth effect, interest rate effect, and foreign price effect influence the shape of the aggregate demand curve. The Short-run Aggregate supply (AS) slopes up, because as the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to produce more to earn higher profits. Thus, the AS curve describes how suppliers will react to a higher price level for final outputs of goods and services, while holding the prices of inputs like labor and energy constant. If firms across the economy face a situation where the price level of what they produce and sell is rising, but their costs of production are not rising, then the lure of higher profits will induce them to expand production.

Which of the following best defines involuntary unemployment?

People are unemployed but willing to work jobs that employ people with similar skills. Involuntary unemployment refers to situations in which the unemployed are willing to work jobs that employ people with similar skills. For example, unemployed people often have friends or acquaintances of similar skill levels who are employed, and the unemployed would be willing to work such jobs if offered to them. However, the employers of their friends and acquaintances do not seem to be hiring. In other words, these people are involuntarily unemployed.

Suppose the U.S. government levies a tax that requires all people to pay 5% of their income to be used for environmental preservation. What type of tax would this be?

Proportional Since all people pay 5% of their income regardless of their income, this tax is "proportional."

Suppose, in France, a law passes that decreases wage rates in its labor market; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction to reflect the effect on the French economy.

Shift right A decrease in the price of inputs, in this case labor, will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower wage rate will encourage production because it will increase the possibilities for earning profits.

Your sister has just given you money for helping her with her economics homework. You rush to deposit this money into your bank account at P&K Bank, which results in an increase in excess reserves of $640. If the reserve requirement is 0.05, then what is the maximum possible change in the money supply from your initial deposit?

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be: M1= 1/reserve requirement ×excess reserves =1/0.05×$640 =$640/0.05 =$12,800

Texas Bank has a reserve requirement of 22%. If you deposit money into a bank account at Texas Bank, which results in an increase in excess reserves of $45 then what is the maximum possible change in the money supply? Round your answer to two decimal places.

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be: excess reserves × 1/reserve requirement =$45×1/0.22 = $204.55

M&V Bank has a reserve requirement of 10%. The Federal Reserve decides that inflation is too low and decides to engage in expansionary monetary policy. As a result, it purchases $20 worth of financial assets from M&V Bank. What is the maximum possible change in the money supply associated with the actions of the Federal Reserve?

The change in money supply (M1) is found by dividing the amount of excess reserves by the reserve requirement. Applying the money multiplier formula, we see that the total change in the money supply will be: Change in M1 = 1/reserve requirement ×excess reserves = 1/0.1×$20 = 10×$20=$200

Which of the following describes the cost of a bank experiencing financial distress?

The convenience of a bank will decline. Bank transactions will become less safe.

What is the money multiplier if the reserve requirement is 0.3 and banks hold no excess reserves and consumers hold no cash? Note: Round your answer to two decimal places.

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1/RR, where RR is the required reserve ratio. In this case, since RR=0.3, MM=1/0.3=3.33.

Calculate the reserve requirement if the money multiplier is equal to 5 and banks hold no excess reserves and consumers hold no cash. Round your answer to the nearest hundredth.

The money multiplier (MM) determines the maximum increase in loans that can be made assuming banks hold no excess reserves and there are no cash holdings in the economy. If these assumptions are true, then the money multiplier formula is MM=1/RR, where RR is the required reserve ratio. To find the reserve requirement, manipulate the money multiplier formula to RR=1/MM. In this case, the reserve requirement is equal to 1/5 or 0.20.

John borrows $50,000 from Bank of Xurbia at a fixed interest rate of 5%. If inflation is 5% at the time the loan is made, then:

The real interest rate on the loan is zero. When interest rates are fixed, and the rate of inflation is equal to the interest rate, suppliers of financial capital, receive repayments that are exactly worth the cost to provide financial capital. That is, the real interest rate is zero.

How would economists define implementation lag?

The time it takes to disperse funds and start a project.

How would economists define a recognition lag?

The time it takes to realize a recession has occurred.

The table below shows the total expenditure on a basket of goods and services; use this information to calculate the index number for the cost of a basket of goods and services in period 1, assuming Period 2 is the base year. (Round to 1 decimal place.)

To convert expenditure on the basket of goods and services to an index number, we use the base year as a starting point from which we measure changes in prices. The base year, by definition, has an index number equal to 100. In this question, Period 2 is the base year so to calculate Period 1 index number, we divide Period 1 spending by Period 2 spending and multiply by 100. 23,020/254.75=90.4

True or false? If the price level is rising, while the costs of production are fixed, suppliers will expand production.

True

True or False: If businesses become more confident about the economy, we can expect investment spending to increase.

True If business confidence is high, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial.

True or false? The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens.

True Monetary policy should be countercyclical; that is, it should act to counterbalance the business cycles of economic downturns and upswings. The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction.

True or false? Central banks provide banking services to the federal government.

True The Federal Reserve, like most central banks, is designed to perform three important functions: To conduct monetary policy To promote stability of the financial system To provide banking services to commercial banks and other depository institutions, and to provide banking services to the federal government.

Which of the following best describes cyclical unemployment?

Unemployment is closely tied to the business cycle. Cyclical unemployment refers to the idea that unemployment is closely tied to the business cycle, like higher unemployment during a recession.

Which of the following will result in a shift in the short-run aggregate supply curve to the right

a decrease in the cost of production machinery An decrease in the price of an input will cause the SRAS curve to shift to the right which means that at each given price level for outputs, a lower price for electricity will encourage production because it will increase the possibilities for earning profits.

Suppose, in order to stimulate the economy out of a recession, the French government decides to increase government expenditure. Use the graph below to illustrate the impact of the aforementioned on the French economy by shifting the appropriate curve(s).

ad shift right

Suppose consumers and businesses expect a recent downward trend in economic activity to continue; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

ad to left shift A decrease in consumer confidence and/or business confidence can shift AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

An increase in the cost of energy

causes a leftward shift of the short-run aggregate supply curve An increase in the price of a major input, such as energy which is used to power production activities, will cause the SRAS curve to shift to the left, which means that at each given price level for outputs, a higher price for energy will discourage production because it will decrease the possibilities for earning profits.

Which of the following graphs most likely illustrates the aggregate expenditures function in the economy?

high at price level(on left), low at real gdp(on right)-- curvy line

A rise in input prices that affects many or most firms across the economy can cause the aggregate supply curve to shift back to the left creating __________.

inflationary pressure An alternative source of inflationary pressures can occur due to a rise in input prices that affects many or most firms across the economy—perhaps an important input to production like oil or labor—and causes the aggregate supply curve to shift back to the left.

The aggregate supply curve:

is upward sloping Aggregate supply (AS) slopes up, because as the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to produce more to earn higher profits.

How does the standardized employment budget deficit compare to the actual budget deficit during a recession?

it is smaller When the economy is in recession, the standardized employment budget deficit is less than the actual budget deficit because the economy is below potential GDP, and the automatic stabilizers are reducing taxes and increasing spending.

How did the federal budget behave in the first decade of the 2000s?

it was in a deficit The budget was briefly in surplus in the late 1990s, before heading into deficit again in the first decade of the 2000s—and especially deep deficits in the 2008-2009 recession.

According to Keynes,

none of the above. Keynes argued that the level of GDP in the economy was not primarily determined by the potential of what the economy could supply, but rather by the amount of total demand.

Suppose, in the nation of Xurbia, input prices within its industrial sector decrease; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

shift right A decrease in the price of inputs will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower price for inputs will encourage production because it will increase the possibilities for earning profits.

Suppose, in the nation of Xurbia, a new technological advancement increases the capacity of all of its major productive sectors; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

shift right In this case, a technological advancement allowed for higher productivity. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

Suppose, in the nation of Xurbia, the government's investment in technology education results in many graduates innovating capacity building solutions and technologies across various sectors; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

shift right In this case, a technological advancement allowed for higher productivity. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

Suppose a law in Xurbia, which previously prevented women from working is repealed, allowing women to work. Illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

shift right The addition of women into the labor force means a larger labor force which can produce more. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

A decrease in the price of an important input such as machinery

shifts the short-run aggregate supply curve to the right A decrease in the price of a major input will cause the SRAS curve to shift to the right, which means that at each given price level for outputs, a lower price for inputs will encourage production because it will increase the possibilities for earning profits.

If the price level increases in the short run, assuming costs of production are unchanged, _________________.

suppliers will increase production

If wage rates increase, while the costs of other inputs remain the same,

the short-run aggregate supply curve shifts to the left An increase in wage rates implies an increase in labor costs which will cause the SRAS curve to shift to the left; because at each given price level for outputs, a higher price for labor input will discourage production because it will reduce the possibilities for earning profits.

Which of the following best describes the debt/GDP ratio?

the total amount the government borrows as a fraction of the GDP The national debt refers to the total amount that the government has borrowed over time. Therefore, the total amount the government borrows as a fraction of the GDP best describes the debt/GDP ratio

True or false. The Individual income tax is based on the individual's yearly income

true An individual income tax is based on the total income an individual makes in a year. This includes income from wages and salaries, as well as other sources of income. It is the largest single source of federal government revenue, but it still represents less than half of federal tax revenue.

Which of the following best defines crowding out?

when government borrowing and spending results in higher interest rates

A fall in consumer confidence

will lead to a leftward shift of the AD curve. If consumer confidence drops, then consumption spending will decline shifting the AD curve to the left.

07b Double coincidence of wants occurs in an economy _______.

without money; that operates only on trade

All of the following statements are true, except:

Countries with controlled economies in the 1970s, like the Soviet Union and China, historically had very high rates of measured inflation during this period.

True or False: Sudden reduction in the availability of resources (inputs and labor) for production will cause the aggregate supply curve to shift to the right.

False Sudden shocks to input goods or labor are termed supply shocks. They decrease aggregate supply and thus the AS curve would shift to the left.

A recession has caused a shift in demand for labor in Country D. This shift is plotted on the graph below. What is the new wage rate in this economy in the short-run?

In the short-run wages are sticky while the economy adjusts, so the wage rate on D1 will be the same as it is on D0 in equilibrium, $25.

Which of the following is true about aggregate demand

It is a measure of total spending on domestic goods and services. Aggregate demand (AD) refers to the amount of total spending on domestic goods and services in an economy.

An economic boom has caused a shift in demand curve for labor from D0 to D1 as seen on the graph below. What is the new wage rate and quantity of labor demanded for this economy?

wage= $20 quantity of labor demanded= 30 The shift to D1 causes the wages to rise from $10 to $20 and the quantity of labor demanded to rise from 20 to 30.

Which of the following could be a reason why the natural rate of unemployment between the US and the EU is different?

Differences in labor laws European rates of unemployment have been higher because the conditions underlying supply and demand for labor have been different in Europe than in the US. Many European countries have a combination of generous welfare and unemployment benefits, together with nests of rules that impose additional costs on businesses when they hire. In addition, many countries have laws that discourage laying off or firing current workers. These laws not only make it difficult for companies to fire or lay off workers, they also become hesitant about hiring in the first place. As such, we can attribute the differences in the natural rate of unemployment in the US and Europe to differences in the laws and regulations related to their labor markets.

True or False? Unlike the unemployment rate, the natural rate of unemployment cannot change over time,

False Since the underlying economic, social, and political factors that influence the natural rate of unemployment can changeover time, the natural rate of unemployment can change over time as well. For example, some of the common reasons that economists propose for the change in natural rate of unemployment in the U.S. economy in the early 2000s : technological changes in the ways workers look for jobs (LinkedIn etc), the growth of the temporary worker industry, and age-related demographic changes in the labor market.

Jackie works for the Bureau of Labor Statistics in Country Y. The data she collected is listed below: Population (adult work-aged) Country Y: 9,600,530 Labor Force Country Y: 4,555,235 What is the labor force participation rate? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (4,555,235 ) by the total adult (working-age) population (9,600,530). Percentage in the labor force=4,555,2359,600,530=.474 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.474)=47.4%

Calculate the labor force participation rate for Country M, whose adult working age population is 9.3 million and labor force is 5.6 million. (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (5.6 million) by the total adult (working-age) population (9.3 million). Percentage in the labor force=5.6/9.3=.602 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.602)=60.2%

Suppose that, on average, the price of goods rose by 6% in 2007 and by 7% in 2006. We can conclude that the economy was experiencing ___________.

a falling inflation rate In 2007, compared to 2006, the price of goods increased by 6%; however, compared to the year before, the price of goods increased by 7% in 2006. Therefore, although the inflation rate was positive, it increased at a slower rate.

A movement along the AD curve up and to the left is caused by

an increase in the price level The AD curve slopes down, which means that increases in the price level of outputs lead to a lower quantity of total spending. Therefore, a movement along the AD curve up to the left must correspond to an increase in the price level

Which of the following best describes hyperinflation?

an outburst of high inflation Hyperinflation is defined as an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy.

Which of the following best describes the employed?

those currently working for pay Those who are currently working for pay are considered employed.

Which of the following graphs most likely illustrates potential GDP

B- middle of Real GDP (vertical) The potential GDP line shows the maximum output that the economy can produce with full employment of workers and physical capital. Since that maximum output is, theoretically, a certain level of output or GDP, potential GDP is illustrated as a vertical line at a certain level of output.

Which of the following graphs most likely illustrates the aggregate supply curve when factors of production are fully employed (typically in the long run)?

B- vertical line middle gdp The aggregate supply curve becomes vertical when factors of production such the inputs of labor and machinery in the economy are fully employed. At this point, firms cannot expand output even if they wanted to.

Which of the following graphs most likely illustrates full employment GDP

B- vertical line(middle of gdp) The full employment GDP line shows the maximum output that the economy can produce with full employment of workers and physical capital. Since that maximum output is, theoretically, a certain level of output or GDP, potential GDP is illustrated as a vertical line at a certain level of output.

Which of the following scenarios describes an individual who is considered 'not in the labor force'?

Clay has no interest in finding paid work and is happy volunteering for 40 hours per week. Those who are considered 'not in the labor force' are those who are not currently working and not actively looking for a new job. Because Clay has no interest in seeking paid employment, he is not considered to be part of the labor force. Karen, Megan, and Kevin are all part of the labor force. Even though Karen is unemployed, she is actively seeking employment and Megan is currently employed, despite thinking about leaving and not seeking new employment. Despite being a full-time student, Kevin is employed part-time, so he is also in the labor force.

True or false? In the imaginary country of Xurbia, large corporations typically hire employees for the long-term, often for life. Suppose, the proportion of older workers, relative to younger workers, in the Xurbian economy was relatively high. We would expect the natural rate of unemployment in Xurbia to be high.

False As the questions implies, older workers in Xurbia are far more likely to experience low unemployment than younger workers because corporations in Xurbia keep workers hired for long. Moreover, older workers tend to have more experience that younger workers therefore we would expect older workers to have less of a difficult time finding employment. Additionally, the question implies that, demographically, there are more older workers than younger workers. As such, we would expect the natural rate of unemployment in Xurbia to be low.

An economic down-turn has caused the labor demand curve to shift from D0 to D1. How many people will be unemployed in the short-run because of this economic downturn?

In the short-run wages are sticky. This means that the wage rate will remain $30 from D0 to D1. At a rate of $30 employers will decrease their labor to quantity from 30 to 15. This is a decrease of 15 employees.

Why does the minimum wage cause wages to be sticky?

It is illegal to reduce wages below minimum wage. Due to minimum wage laws, it is illegal to reduce wages below the set minimum. The minimum wage is, essentially, a price floor and employers are not allowed to pay wages below it. It is in this sense that wages are sticky when they are near or at the price floor.

True or false? Wages are considered sticky when they do not fall in response to a decrease in demand.

True Wages are sticky when earnings don't adjust quickly to changes in labor market conditions. Therefore, wages are considered sticky when they do not fall in response to a decrease in demand, or they do not rise in response to an increase in demand.

How many people became unemployed in the short-run due to the economic recession represented by the shift in labor demand from D0 to D1 in the graph below?

Quantity of labor demanded decreases from 20 to 5 as the demand curve shifts from D0 to D1. 20−5=15 people became unemployed. Wages remain sticky in the short-run at $25 (this is the equilibrium price on D0) and so less labor is demanded at this high price.

The graph below represents an economy in recession with a shift in labor demand from D0 to D1. What will be the new quantity of labor demanded in the short-run? Please enter your answer in the answer box below.

Quantity of labor demanded= 5 The quantity of labor demanded shifts from 20 at $25 on D0 to 5 at $25 on D1. This is because wages are sticky in the short-run and causes the price to remain at $25. With a new labor demand, at $25 employers are not willing to employ as many people, so we see the quantity of demand decrease while the wage remains sticky in the short-run.

Suppose, in the nation of Xurbia, input prices within its manufacturing sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

Shift left Increases in the price of manufacturing sector inputs will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will reduce the possibilities for earning profits.

If the number of unemployed people actively seeking work is 10.4 million, and the number of employed people is 111.3 million, what is the unemployment rate? Round the answer to the nearest tenth.

Since the labor force is divided into employed persons and unemployed persons, the total labor force is 111.3+10.4=121.7 million. Then, the unemployment rate can be calculated as, Unemployment Rate=Unemployed /People Total Labor Force×100 =10.4/121.7×100=8.5%

There are currently 15.34 million people who are not working but are available and actively looking for jobs and 506.21 million people who are employed. What is the unemployment rate? Round your answer to the nearest tenth.

Since the labor force is divided into employed persons and unemployed persons, the total labor force is 506.21+15.34=521.55 million. Then, the unemployment rate can be calculated as, Unemployment Rate=Unemployed People/Total Labor Force×100 =15.34/521.55×100= 2.9%

Georgia is studying economics in college and was asked to calculate the unemployment rate for Country S. If Country S has 565 employed people and 30 unemployed people, what is the unemployment rate of Country S?

Since the labor force is divided into employed persons and unemployed persons, the total labor force is 565+30=595. Then, the unemployment rate can be calculated as, Unemployment Rate=Unemployed People/TotalLaborForce×100 =30/595×100=5.0%

The table below shows the total expenditure on a basket of goods and services in two consecutive years. Use this information to calculate the inflation rate in Year 2. (Round your answer to two decimal places.) Total Expenditure ;Inflation Rate Year 1; $12,550 ;− Year 2; $13,475 ;?

The equation for calculating the inflation rate is: (Expenditure in new period - Expenditure in previous period)/Expenditure in previous period×100=Inflation rate Substituting the respective values given in the table, we have the following: Total Expenditure ;Inflation Rate Year 1; $12,550 ;− Year 2; $13,475 ; (13,475−12,550)/12,550×100 ≈7.37 %​

The table below shows the index numbers for the cost of a basket of goods and services in each period. Use this information to calculate the inflation rate since the previous period. Enter the answers in order starting with Period 2. (Round to two decimals.)

The equation for calculating the inflation rate is: (Index in new period-Index in previous period)/Index in previous period×100=Inflation rate Substituting the respective values given in the table, we have the following:

All of the following statements about government policy and unemployment are true, except:

The funding for unemployment insurance is a municipal tax collected from employers. The funding for unemployment insurance is a federal tax collected from employers. The federal government requires tax collection on the first $7,000 in wages paid to each worker; however, states can choose to collect the tax on a higher amount if they wish, and 41 states have set a higher limit.

05a: The Bureau of Labor Statistics is calculating the unemployment rate. If there are currently 98.7 million people in the labor force of which 5.6 million are unemployed, what is the current unemployment rate? Round your answer to the nearest tenth.

The unemployment rate is the ratio of unemployed individuals to the size of the labor force. The current unemployment rate for this economy is Unemployment Rate= Unemployed People/Total Labor Force×100 =5.6/98.7×100=5.7%

The Bureau of Labor Statistics is calculating the unemployment rate. If there are currently 159.87 million people in the labor force of which 7.21 million are unemployed, what is the current unemployment rate? Round your answer to the nearest tenth.

The unemployment rate is the ratio of unemployed individuals to the size of the labor force. The current unemployment rate for this economy is Unemployment Rate=Unemployed People/Total Labor Force×100 =7.21/159.87×100=4.5%

The adult working-age population is 241.7 million, 103.8 million of whom are not in the labor force. If there are 8.4 million unemployed individuals, what is the unemployment rate? Round your answer to the nearest tenth.

The unemployment rate is the ratio of unemployed people to the total labor force. The total labor force is divided into employed persons and unemployed persons, and the total population is composed of the labor force and those not in the labor force. So, to find the total labor force, we can subtract the number of people 'not in the labor force' from total population, 241.7−103.8=137.9 million. Since the number of unemployed people is given, the unemployment rate can be calculated as, Unemployment Rate=Unemployed People/Total Labor Force×100 =8.4/137.9×100=6.1%

The table below shows the total expenditure on a basket of goods and services for three consecutive years. Use this information to calculate the index number for the cost of the basket of goods and services in Years 2 and 3, assuming Year 1 is the base year. (Round your answers to one decimal place.)

To convert expenditure on the basket of goods and services to an index number, we use the base year as a starting point from which we measure changes in prices. The base year, by definition, has an index number equal to 100. In this question, Year 1 is the base year, so to calculate the index number for Year 2, we divide Year 2 spending by Year 1 spending and multiply by 100. Similarly, to calculate the index number for Year 3, we divide Year 3 spending by Year 1 spending and multiply by 100. Note: Mathematically, this is the same as dividing expenditure in the relevant year by 12,240/100=122.4. 12,900/122.4≈105.4 13,538/122.4≈110.6

Suppose the adult population over the age of 16 is 237.8 million and the labor force is 153.9 million. What is the labor force participation rate? Round your answer to the nearest tenth.

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (153.9 million) by the total adult (working-age) population (237.8 million). Percentage in the labor force=153.9/237.8=.647 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.647)=64.7%

The Bureau of Labor Statistics is interested in this years labor participation rate. If there are 350 million working-age adults and 300 million in the labor force, what is the labor participation rate? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (300 million) by the total adult (working-age) population (350 million). Percentage in the labor force= 300,000,000/350,000,000=.857 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.857)=85.7%

In an effort to provide accurate statistics about the labor force related to the population, new data was collected regarding the population in Country E. The current population of working-age adults is 542,093 people and the labor force is 398,450 people. What is the labor force participation rate for Country E? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (398,450 million) by the total adult (working-age) population (542,093 million). Percentage in the labor force=398,450/542,093=.735 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.735)=73.5%

Comparing the percentage of the labor force population to the total adult working-age population gives you the labor force participation rate. If the the adult working-age population is is 756 million and the labor force is 652 million what is the labor force participation rate? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force (652 million) by the total adult (working-age) population (756 million). Percentage in the labor force=652/756=.862 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.862)=86.2%

If the total adult working age population of the U.S. is 350 million, the number of unemployed people is 20 million, and the number of employed people is 170 million, what is the labor force participation rate? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force by the total adult (working-age) population (350 million). To solve for the total labor force add the employed (170 million) to the unemployed (20 million) which equals 190 million. Percentage in the labor force=190/350=.543 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.543)=54.3%

If there are 56 million unemployed and 200 million employed people in Country N, what is the labor force participation rate if Country N's total adult working-age population is 389 million people? (round your answer to the nearest 10th)

To solve for the labor force participation rate follow the steps below: Step 1. Divide the number of people in the labor force by the total adult (working-age) population (389 million). To solve for the total labor force add the employed (200 million) to the unemployed (56 million) which equals 256 million. Now solve for the labor force participation rate. Percentage in the labor force=256/389=.658 Step 2. Multiply by 100 to obtain the percentage. Percentage in the labor force=(100)×(0.658)=65.8%

True or False: Keynes' law best applies to short time horizons that see fluctuations in total demand.

True Keynes' law applies fairly well in the short run of a few months to a few years, when many firms experience either a drop in demand for their output during a recession or so much demand that they have trouble producing enough during an economic boom. However,

True or false? A person who is working, self-reporting herself as unemployed is an example of how the U.S. Bureau of Labor Statistics may overstate the unemployment rate.

True Individuals who earn money under the table and do not want report to the tax authorities might report they are unemployed even though they are getting paid to work. Such instances are examples how the U.S. Bureau of Labor Statistics may overstate the unemployment rate.

True or false? The Current Population Survey (CPS) measures the percentage of the labor force that is unemployed, as well as how a person came to be unemployed.

True The CPS includes information about unemployment, including the percentage of people who are unemployed and how they came to be unemployed. Additionally, the CPS includes information about whether the unemployed person is the only wage earner in the family.

True or False: Potential GDP is synonymous with full employment GDP.

True When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low—at the natural rate of unemployment. For this reason, potential GDP is sometimes also called full-employment GDP.

True or False: Potential GDP is the amount of real GDP an economy can produce by fully employing its factors of production

True Potential GDP is the amount of real GDP an economy can produce by fully employing its existing levels of labor, physical capital, and technology -- i.e. its factors of production -- in the context of its existing market and legal institutions.

Graphically, the long-run aggregate supply curve is

Vertical The vertical line that represents an economy's potential GDP is its long run aggregate supply (LRAS).

The labor demand decrease graphed below represents a contracting economy. The labor demand curve decreased to the left because of a decrease in output demand. In the short-run what is the labor demanded wage due to this shift?

Wage= $30 With the decrease in economic demand, companies will decrease production. In the short-run the wage will remain the same or will remain sticky while the economy adjusts. The wage in equilibrium on D0 is $30 and will remain at $30 in the short-run on D1.

Look at the graph below. Labor demand falls from D0 to D1 due to an economic recession. What is the resulting wage in the short-run due to this shift in demand? HINT: Consider whether this is a situation in which the wages are sticky or flexible.

Wage=$30 Because wages are sticky in the short-run the wage will remain at $30 but the quantity demanded at $30 will decrease demand to D1 at Q=15.

All of the following statements are true, except:

When interest rates are fixed, demanders of financial capital typically end up worse off than suppliers of financial capital.

Bob is currently unemployed and spends approximately 35 hours per week looking for a job. Is Bob considered part of the labor force?

Yes Bob is considered part of the labor force because he is unemployed. The labor force takes into account those who are employed and those who are unemployed. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks.

The inflation rate captures year-on-year price level differences. If in 2006 the inflation rate was 5% and in 2005 the inflation rate was 6%, this implies that

between 2005 and 2006, the price level rose at a slower rate Compared to the year before, the price level in 2005 increased by 6%; however, compared to 2005, the price in 2006 went up by 5%. Therefore, although the inflation rate was positive, it increased at a slower rate between 2006 and 2005 than in 2005 and 2004.

Matt's wife is in the Army and has received orders to a military installation 2000 miles away. Matt resigns from his current job and he and his wife move across the country. Matt then actively searches for similar positions near the military installation where his wife is working. What type of unemployment is Matt experiencing?

frictional unemployment Frictional unemployment is unemployment that occurs as workers move between jobs. Because Matt is in between jobs, he is considered to be frictionally unemployed

The substitution bias __________________.

helps explain why the CPI overestimates inflation When the price of a good rises, consumers tend to purchase less of it and to seek out substitutes instead. This pattern implies that goods with generally rising prices should tend over time to become less important in the overall basket of goods used to calculate inflation, while goods with falling prices should tend to become more important. Thus, substitution bias—the rise in the price of a fixed basket of goods over time—tends to overstate the rise in a consumer's true cost of living, because it does not take into account that the person can substitute away from goods whose relative prices have risen.

If the CPI leaves out new higher quality goods, it is overlooking one of the ways in which the standard of living is ____________.

improving People buy higher quality goods because they offer better value for money than existing goods. The quality/new goods bias means that the rise in the price of a fixed basket of goods over time tends to overstate the rise in a consumer's true cost of living, because it does not account for how improvements in the quality of existing goods or the invention of new goods improves the standard of living.

Which of the following best defines the underemployed?

individuals who are trained or skilled for one type or level of work but are working in a job that does not utilize their skills The category of the underemployed includes those who are trained or skilled for one type or level of work but are working in a lower paying job or one that does not utilize their skills. For example, we would consider an individual with a college degree in finance who is working as a sales clerk underemployed. This category also includes people who have only part time or temporary jobs but are looking for full time and permanent employment. These people are counted as employed, although they are not employed in the way they would like or need to be.

Discouraged workers are included in ___________________.

none of the above A person who is out of work, would like to work, has looked for work in the past year, and is available for work, but who has given up looking, is considered a discouraged worker. Discouraged workers are not counted as unemployed, but a tally is kept each month of the number of discouraged workers. They are not part of the labor force since they are not considered employed or unemployed.

Suppose that over time, households used flash sale online retailers at an increasing rate. As a result the CPI is likely to be ________________.

overestimated because households would buy products at lower prices than those collected by the U.S. Bureau of Labor Statistics

Substitution behavior by households causes the inflation rate to be ______________________.

overstated The substitution bias - the rise in the price of a fixed basket of goods over time—tends to overstate the rise in a consumer's true cost of living, because it does not take into account that the person can substitute away from goods whose relative prices have risen.

06B Suppose a law in Xurbia requires employees to work more hours per week (without an increase in yearly pay); illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

shift right Longer work hours implies that workers will produce more. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

Carl has worked on a factory line for years. Recently, his job on the line has been increasingly replaced by robotics in his industry. As a result, Carl is laid off. Carl is struggling to find a job in his particular field because the majority of positions have been eliminated due to robotics technology. What type of unemployment is Carl experiencing?

structural unemployment Structural unemployment is unemployment that occurs because individuals lack skills valued by employers. Because Carl's skill set is no longer needed in his industry, he is considered structurally unemployed.

Suppose that in 2008 the price of chicken relative to fish goes up. As a result, households start to move away from purchasing chicken and move toward purchasing more fish. This is an example of ________________.

substitution behavior When households specifically respond to price changes by buying more of the product that has a relatively lower price, this is an example of substitution behavior.

Relative to Europe, the U.S. enacts better policies to make it easier for businesses in the U.S. to begin or to expand. As a result, the natural rate of unemployment in ______________is likely to be lower than the natural rate of unemployment in ________________.

the U.S; Europe Government policies that make it easier for businesses to begin or to expand are likely to encourage the demand for labor. As a result, the number of jobs available for job seekers would increase. Consequently, the natural rate of unemployment would be lower than that of an economy whose policies are not as robust in encouraging the start and expansion of businesses.

The Panda Toy Company is losing money and reacts by reducing wages for all 250 employees. As a result, the employees with the best employment alternatives at other toy companies end up leaving. Which of the following best describes why this scenario can lead to wage stickiness?

the adverse selection of wage cuts argument The adverse selection of wage cuts argument points out that if an employer reacts to poor business conditions by reducing wages for all workers, then the best workers, those with the best employment alternatives at other firms, are the most likely to leave. The least attractive workers, with fewer employment alternatives, are more likely to stay.

Which of the following best describes the insider-outsider model of the labor force?

those already working for firms are "insiders", while new employees, at least for a time, are "outsiders" The insider-outsider model of the labor force argues that those already working for firms are "insiders," while new employees, at least for a time, are "outsiders." A firm depends on its insiders to keep the organization running smoothly, to be familiar with routine procedures, and to train new employees. However, cutting wages will alienate the insiders and damage the firm's productivity and prospects.

Which of the following best describes those 'not in the labor force'?

those who are out of paid work and not actively looking for a job Those who are not working and not looking for work are considered to be 'not in the labor force.' This group can include groups of people such as those who are retired, stay at home parents, full-time students, etc.

Which of the following best describes the unemployed?

those who are out of work and actively looking for a job To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. If a person is not currently working and not looking for work, they are classified as 'not in the labor force.'

An economic downturn has caused the labor demand to decrease from D0 to D1. In the short-run what will be the new wage and level of employment?

wage=$20 quantity of labor demanded= 15 With the case of an economic downturn, wages are sticky in the short-run so the wage rate from D0 to D1 remains the same at $20. However employers that have to continue to pay their current employees the same wage rate will no longer demand as many employees at that rate. And quantity of labor demanded will drop from 30 to 15.

With a economic expansion from D0 to D1 seen on the figure below, what will be the new wage rate for this economy?

wage=$25 The new wage as labor quantity demanded increases from D0 to D1 is $25. This can be seen at the new equilibrium point where supply, S, and demand, D1, intersect.