Macro Economics Final Exam !!
Which of the following explain why flexible-income receivers may be unaffected or benefit by unanticipated inflation?
- Business owner's profits may rise if product prices rise faster than resource prices. - Demand-pull inflation may cause some nominal incomes to increase faster than inflation and lead to real income increases. - The receive COLAs. - Their incomes may automatically increase when the CPI increases.
Suppose that an economy has 9 million people working full-time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this economy's unemployment rate? 15 percent. 10 percent. 20 percent. 25 percent.
10 percent.
deflation
A negative rate of inflation calculated when the CPI declines from one year to the next. Difficult to distinguish between the causes of inflation, unless the origin is known.
In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates? A. Expansion B. Recession C. Peak D. Trough
A. Expansion
business cycles
Alternating increases and decreases in economic activity over time. Four phases: peak, recession, trough, and expansion.
1. Place the phases of the business cycle in order. LO1 a. Recession b. Trough c. Peak d. Expansion
Answer: Peak, Recession, Trough, Expansion. The typical business cycle goes through four phases in the following order: peak, recession, trough, expansion.
Occasionally, rapidly rising prices for basic inputs such as energy result in higher prices for many goods and services. The resulting inflation is best categorized as: A) Cost-pull B) Cost-push C) Demand-pull D) Demand-push
B) Cost-push Feedback: These supply shocks raise per-unit costs of production and are passed on to consumers in the form of higher prices for goods and services. The increased input prices "push up" the price level.
The rate of unemployment when the economy is at its potential output is called the: A. Full-employment rate of unemployment B. Natural rate of unemployment C. Structural rate of unemployment D. Frictional rate of unemployment
B. Natural rate of unemployment
If the natural rate of unemployment is 5.5% and the actual unemployment rate is 6.5%, then, according to Okun's law the GDP gap is: A) 1% B) 3% C) -1% D) -2%
D) -2% Feedback: Okun's law states that there is a negative GDP gap of 2% for every percentage point that the unemployment rate is above the natural rate.
recession
Decline in total output, income, employment, and trade lasting six months or more.
(durable goods)
Firms and industries producing capital goods (equipment) and consumer durables (lifetime > 3 years) are affected most by the business cycle and recessions. Within limits, firms can postpone the purchase of capital goods (repairs rather than replacement).
(nondurable goods)
Industries that produce nondurable consumer goods (services and food and clothing) are less affected by recessions. Difficult to postpone the purchase of food and clothes.
_______ redistributes total real income.
Inflation
(redistribution effects of inflation)
Inflation redistributes real income. This redistribution helps some people and hurts some others, while leaving many people largely unaffected.
(sources of shocks that can cause business cycles)
Irregular innovation; Productivity changes; Monetary factors; Political events; Financial instability
nominal income
Number of dollars received as wages, rent, interest, or profit. Unadjusted for inflation.
structural unemployment
Occurs due to changes in the structure of the demand for labor, more long-term.
expansion
Output and employment are recovering and expanding toward the full employment level.
When prices are sticky in the short-run, the economy is forced to respond by changes in:
Output; Employment
(unequal burdens)
Part of the burden of unemployment is that its cost in unequally distributed. Unequal burdens include: Occupation; Age; Race and ethnicity; Gender; Education; Duration.
Place the phases of the business cycle in order.
Peak, recession, trough, expansion, peak
real interst rate
Percentage increase in purchasing power that the borrower pays the lender.
cost-push inflation
Prices rise because of a rise in per-unit production costs. The theory of cost-push inflation explains rising prices in terms of factors that raise per-unit production costs at each level of spending. Major source of cost-push inflation are supply shocks.
anticipated inflation
Situations in which people see an inflation coming in advance.
demand-pull inflation
Spending increasing faster then production (output). Caused when the central bank issues too much money. Excess demand bids up the prices of limited output. "Too much spending chasing too few goods."
per-unit production costs
The average cost of a particular level of output. Per-unit production cost = total input cost / units of output
(economic cost of unemployment)
The basic economic cost of unemployment is forgone output. When the economy fails to create enough jobs for all who are able and willing to work, potential production of goods and services is irretrievably lost. Economists call this sacrifice of output a GDP gap.
Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in: The level of the stock market. The level of the trade deficit. The level of unemployment. The level of total spending.
The level of total spending.
Consumer Price Index (CPI)
The main measure of inflation in the United States. The government uses this index to report inflation rates each month and each year. The rate of inflation is equal to the percentage growth of CPI from one year to the next. CPI = (price of the most recent market basket in the particular year / price estimate of the market basket in 1982-1984) x 100
core inflation
The underlying increases in the CPI after volatile food and energy prices are removed.
potential output
This is the real GDP that occurs when the economy is "full employed."
discouraged workers
Want a job, but are not actively seeking one. Not counted as being in the labor force, so they are not part of the unemployment statistic.
frictional unemployment
Workers who are either searching for jobs or waiting to take jobs in the near future, more short-term. Consists of search unemployment and wait unemployment.
A business cycle is:
a short-run alternation between economic upturns and downturns
Suppose that a country's annual growth rates were 5, 3, 4, -2, -3, 3, 4, 5, 6, and 3 in yearly sequence over a 10-year period. Instructions: In part a, round your answer to 1 decimal place. In part b, enter your answers as whole numbers. a. What was the country's trend rate of growth over this period? ___ percent. b. Which set of years most clearly demonstrates an expansionary phase of the business cycle? Years ___ through ___. Which set of years best illustrates a recessionary phase of the business cycle? Years ___ through ___.
a. 2.8 percent. b. Years 6 through 9. c. Years 4 through 5. Feedback: The trend rate of growth equals the average for the 10-year period, which is 2.8 percent. The set of years that best illustrate a recessionary phase is years 4 and 5. Growth is negative (declining GDP) for these years.
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated and is looking for a job: ___ b. A recession causes a local factory to lay off 30 workers: ___ c. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant: ___ d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India: ___
a. Frictional unemployment b. Cyclical unemployment c. Structural unemployment d. Structural unemployment
A negative GDP gap is associated with cost-push inflation. output inflation. demand-pull inflation. international inflation.
cost-push inflation.
A positive GDP gap is associated with output inflation. cost-push inflation. demand-pull inflation. international inflation.
demand-pull inflation.
A major new invention can lead to an expansion if there are decreases in wealth but increases in consumption and unemployment. decreases in saving but increases in consumption and unemployment. increases in investment, consumption, output, and employment. increases in saving, the money supply, and employment.
increases in investment, consumption, output, and employment.
Inflation exists when there is an increase in _______ over a sustained period of time.
prices
Unexpected events that drive economic cycles and fluctuations are called economic _______.
shocks
The consequence of a negative GDP gap is that interest rates will fall and lower national savings. people will not be able to afford to go to college. what is not produced is lost forever and future economic growth will be less. it requires public policy to correct.
what is not produced is lost forever and future economic growth will be less.
Identify all of the results of unexpected higher total spending in the short-run when prices are sticky.
GDP rises; More goods and services are purchased; Output rises; Employment rises
unanticipated inflation
Causes real income and wealth to be redistributed, harming some and benefiting others.
GDP gap
GDP gap = actual GDP - potential GDP The sacrifice of output. Can be negative or positive. Unemployment > NRU = (Negative) society is operating at some point inside its production possibilities curve (PPC).
Demand-pull inflation occurs when there are increases in per-unit costs of production. there is a negative price gap. prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output. there is a negative GDP gap.
prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
An expansion is a period in which:
the price level may rise; output rises
The labor force is:
the sum of the employed and unemployed
unemployment rate
= unemployed / labor force x 100 Data collected for unemployment is criticized for understating actual unemployment because involuntary part-time workers are counted as full-time, even if they really want FT work and discouraged workers are not counted as unemployed.
Suppose the CPI is currently 126, while its value one year previously it was 120. The rate of inflation over the past year was: A) 5% B) 6% C) 7% D) 8%
A) 5% Feedback: The rate of inflation is the percentage increase in the value of the CPI. In this example, the rate of inflation is (126 - 120) / 120 = .05, or 5%.
real income
A measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or an income adjusted for inflation. Real income = nominal income / price index (in hundredths) Percentage change in real income is approximately equal to percentage change in nominal income - percentage change in price level
inflation
A rise in the general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Reduces the "purchasing power" of money.
Unanticipated inflation: A) arbitrarily redistributes income from creditors to debtors B) invariably leads to unemployment C) reduces the real incomes of all individuals D) has the same economic consequences as anticipated inflation
A) arbitrarily redistributes income from creditors to debtors Feedback: If inflation is unanticipated, lenders will be repaid in dollars that have less purchasing power than what they bargained for while borrowers will repay those loans with "cheaper" dollars.
In general, unemployment rates are higher for African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers. African Americans, Hispanics, women, and less-educated workers. workers in lower-skilled occupations, Hispanics, women, and less-educated workers. less-educated workers, African Americans, workers in lower-skilled occupations, and women.
African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers.
cost-of-living adjustments (COLAs)
An automatic increase in the incomes (wages) or workers when inflation occurs; often included in collective bargaining agreements between firms and unions. Cost-of-living adjustments are also guaranteed by law for Social Security benefits and certain other government transfer payments.
5. How long would it take for the price level to double if inflation persisted at (a) 2, (b) 5, and (c) 10 percent per year? LO3
Answer: (a) 35 years; (b) 14 years; (c) 7 years. Feedback: The "Rule of 70," which is to divide 70 by the inflation rate, gives us the time it takes for the price level to double. Years to double = (70 / Inflation Rate) Using this formula we have: (a) The price level will double in 35 years if the inflation rate is 2% (= 70/2). (b) The price level will double in 14 years if the inflation rate is 5% (= 70/5). (c) The price level will double in 7 years if the inflation rate is 10% (= 70/10).
7. Cost-push inflation occurs when there is __________________________. LO3 a. Excess inventory. b. A trade deficit. c. Rising per-unit production costs. d. Excess demand for goods and services.
Answer: c. Rising per-unit production costs. Cost-push inflation occurs when rising per-unit production costs squeeze company profits, thereby causing firms to reduce the amount of output that they are willing to supply at the current price level. This leads to higher unemployment because fewer workers are needed to produce less output.
6. If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation? LO4
Answer: 1.5 percent; 1.7 percent. Feedback: To find the approximate percentage change in the real value of your income, subtract the rate of inflation from the nominal percentage change in your income. Percentage change in real income = Percentage change in nominal income - Inflation rate This implies the percentage change in real income is approximately 1.5% (= 5.3% - 3.8%). We can also rearrange the equation above as follows: Inflation rate = Percentage change in nominal income - Percentage change in real income This implies the inflation rate is approximately 1.7% (= 2.8% - 1.1%) for the second set of values.
2. Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the official unemployment rate? LO2
Answer: 230; 10%. Feedback: To find the size of the labor force subtract population under 16 years of age or institutionalized (120) and those not in the labor force (150) from the population (500). The size of the labor force is 230 (= 500 - 120 -150). The official unemployment rate is the number of individuals unemployed divided by the labor force converted into percentage form. The unemployment rate for the values above is 10% (= (23/230) x 100).
3. Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 9 percent. Use Okun's law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? LO2
Answer: GDP gap = 8%; $40 billion. Feedback: On the basis of recent estimates, Okun's law indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs. The actual rate of unemployment exceeds the natural rate of unemployment by 4% (= 9% - 5%), which is cyclical unemployment. Using Okun's law, this translates into an 8% GDP gap in percentage-point terms (= 2 x 4%). Since potential GDP is $500 billion and we are 8% below this amount, the output forgone is $40 billion (= 0.08 x $500 billion).
3. Suppose that an economy has 9 million people working full time. It also has 1 million people who are actively seeking work but currently unemployed as well as 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this economy's unemployment rate? LO2 a. 10 percent. b. 15 percent. c. 20 percent. d. 25 percent.
Answer: a. 10 percent. This economy's unemployment rate is 10 percent because the number of unemployed is 1 million and the size of the labor force is 10 million. To see why 10 percent is the correct answer, recall that the formula for calculating the unemployment rate is To apply the formula, we need numbers for "unemployed" and "labor force." Let's start with the size of the labor force, which by definition is the sum of the number of people who are employed plus the number of people who are not currently working but who are actively seeking work. For this economy, the labor force would consequently be 10 million (= 9 million employed + 1 million unemployed but actively seeking work). We next need to figure out how many "unemployed" workers there are. Remember that as far as the unemployment statistic is concerned, we are looking for people who want jobs, are actively seeking jobs, but don't currently have jobs. That is, we totally exclude the discouraged workers. They are excluded because, by ceasing to look for work, they are no longer in the labor force, which by definition consists of everybody willing and able to work right now. By focusing only on the workers without jobs who are still actively seeking work, we see that there are 1 million "unemployed" workers in the labor force. By plugging in our values for the labor force (10 million) and the number of "unemployed" (1 million) we see that this economy's unemployment rate is 10 percent [= (1 million/10 million) times 100].
2. Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in ___________________. LO1 a. The level of total spending. b. The level of the stock market. c. The level of the trade deficit. d. The level of unemployment.
Answer: a. The level of total spending. Most economists agree that the immediate cause of the large majority of cyclical changes in the levels of real output and employment is unexpected changes in the level of total spending. Total spending may change for a number of reasons including political events, financial instability, and monetary factors. But it is unexpected changes in total spending that drive the large majority of cyclical changes in real GDP.
5. The unemployment rate that is consistent with full employment is known as _________________________. LO2 a. The natural rate of unemployment. b. The unnatural rate of unemployment. c. The status quo rate of unemployment. d. Cyclical unemployment. e. Okun's rate of unemployment.
Answer: a. The natural rate of unemployment. The natural rate of unemployment is in fact defined as the unemployment rate that is consistent with full employment. Keep in mind that when we say full employment, we mean that the economy is only experiencing frictional and structural unemployment. That is, there is no cyclical unemployment. Thus, while not every worker will be employed, only those temporarily between jobs (the frictionally unemployed) and those whose skills fail to match the needs of employers (the structurally unemployed) will be without work.
11. Economists agree that inflation reduces real output. LO5 a. Cost-push. b. Demand-pull.
Answer: a. cost-push. The correct answer is that economists agree that cost-push inflation reduces real output. Cost-push inflation reduces real output because the unexpected increases in resource prices that drive cost-push inflations reduce firm profits. Those falling profits then cause firms to reduce output and lay off workers. By contrast, economists disagree about whether demand-pull inflation increases or decreases real output. On the one hand, some economists argue that demand-pull inflation reduces output because people divert time that could otherwise be spent producing output into attempts to hedge against inflation. On the other hand, a different group of economists argue that mild levels of demand-pull inflation may help to increase output because the high levels of spending that cause demand-pull inflation also create high profits and a powerful incentive for firms to expand their plants, increase their output, and hire more workers.
trough
Bottom of the recession period.
6. A country's current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy's negative GDP gap? LO2 a. 1 percent. b. 3 percent. c. 6 percent. d. 10 percent.
Answer: d. 10 percent. This economy's negative GDP gap should be about 10 percent. This estimate is based upon Okun's law, which indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percentage points occurs. To apply Okun's law to the current situation, we first note that actual unemployment exceeds the natural rate by 5 percentage points (= 11 percent actual rate of unemployment minus 5 percent natural rate of unemployment). It then follows that the negative GDP gap must be 10 percent (= 5 percentage points times 2).
8. Jimmer's nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Jimmer's real income change next year? LO3 a. -2 percent. b. 8 percent. c. 10 percent. d. 12 percent.
Answer: d. 12 percent. Jimmer's real income will rise by 12 percent next year. You can see this by rearranging the formula that shows the relationship between real income, nominal income, and inflation: % change in real income = % change in nominal income - % change in price level Using that formula, we see that the percentage change in Jimmer's real income will be approximately equal to the 10 percent increase in his nominal income minus the percentage change in the price level (which will be minus 2 percent). Taking into account the fact that a "minus times a minus is a plus" we see that Jimmer's real income should be approximately 12 percent [= 10 percent increase in nominal income - (-2 percent change in price)].
9. Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank? LO4 a. 4 percent. b. 5 percent. c. 6 percent. d. 7 percent.
Answer: d. 7 percent. The lowest nominal interest rate that Kaitlin would be willing to accept is 7 percent. She would of course be happier to get more than 7 percent. But the lowest nominal rate that she would accept is 7 percent because that is the lowest nominal interest rate that would give her the 4 percent real rate of return that she wishes to earn. To see why that is true, recall the formula that states that nominal interest rate = real interest rate + inflation premium (the expected rate of inflation) Given that the real interest rate that Kaitlin desires is 4 percent and given that she is expecting inflation to be 3 percent, the right-hand side of the formula tells us to add the two values together in order to figure out the nominal interest rate that Kaitlin will accept. Doing so tells us that she will accept a nominal interest rate of 7 percent (= 4 percent real interest rate + 3 percent expected rate of inflation). She is happy to accept that rate because it will yield her the real return of 4 percent that she desires. By contrast, if she were to accept a nominal interest rate of 5 percent, then she would only make a real rate of return of just 2 percent. You can see this by rearranging the formula and solving for the real interest rate. Doing so yields, real interest rate = nominal interest rate − inflation premium (the expected rate of inflation) Using this version of the formula, we can see that the real interest rate in this situation would only be 2 percent (= 5 percent nominal interest rate minus 3 percent expected rate of inflation). Because that real rate of 2 percent is less than the 4 percent rate that Kaitlin wants, she will not give the bank her money if the best they offer is a 5 percent nominal interest rate. She will hold out for at least a 7 percent nominal rate, as that is the only way for her to get a real return of at least 4 percent.
10. True or False: Lenders are helped by unanticipated inflation. LO4
Answer: false. This statement is false because lenders are actually hurt (rather than helped) by unanticipated inflation. Unanticipated inflation hurts lenders by reducing real returns. As an example, suppose that you loaned out $1000 at a nominal interest rate of 10 percent. Also suppose that you had been expecting an inflation rate of 2 percent so that you were anticipating a real interest rate of 8 percent (= 10 percent nominal interest rate minus 2 percent inflation rate). But then suppose that inflation turns out to be 10 percent. As a result, your real interest rate will turn out to be zero percent (= 10 percent nominal interest rate minus 10 percent inflation rate). Thus, you will suffer substantial financial harm because the unexpectedly high inflation rate lowers your real rate of return down to nothing in this case. But note that things don't have to be that extreme for you to be hurt. Any inflation rate that turns out to be higher than what you were expecting will lower your real rate of return.
4. Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. LO2 a. Tim just graduated and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant. d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.
Answers: a. frictional unemployment b. cyclical unemployment c. structural unemployment d. structural unemployment Let's go through each scenario in order. Tim just graduated and is looking for a job is an example of frictional unemployment because Tim is merely transitioning from school to work. He is not unemployed because of a recession (cyclical unemployment) or because he lacks skills desired by employers (structural unemployment). A recession causes a local factory to lay off 30 workers is an example of cyclical unemployment because the downturn in the business cycle has led to these 30 workers losing their jobs. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant is an example of structural unemployment because the drivers are losing their jobs as the result of a technological innovation which has destroyed the demand for human driving skills. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India is an example of structural unemployment because the demand for legal skills has permanently dropped in New York due to competition from India.
4. If the CPI was 110 last year and is 121 this year, what is this year's rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year's rate of inflation? What term do economists use to describe this second outcome? LO3
Answers: 10 percent; -1.8 percent; deflation. Feedback: The inflation rate is the percentage change in the CPI over a period of time. For the values above we have: If the CPI was 110 last year and is 121 this year, the inflation rate was 10% (= ((121-110)/110) x 100). If the CPI was 110 last year and is 108 this year, the inflation rate was approximately -1.8% (= ((108-110)/110) x 100). This outcome is referred to as deflation by economists.
7. Suppose that the nominal rate of inflation is 4 percent and the inflation premium is 2 percent. What is the real interest rate? Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium? LO4
Answers: 2 percent; 5 percent. Feedback: To find the approximate real interest rate subtract the inflation premium from the nominal interest rate. Real interest rate = nominal interest rate - inflation premium This implies the real interest rate is 2% (= 4% - 2%). We can also rearrange the equation above as follows: Inflation premium = nominal interest rate - real interest rate This implies the inflation premium is 5% (= 6% - 1%).
cyclical unemployment
Caused by the recession phase of the business cycle. As the demand for goods and services decreases, employment falls and unemployment rises.
1. Suppose that a country's annual growth rates were 5, 3, 4, -1, -2, 2, 3, 4, 6, and 3 in yearly sequence over a 10-year period. What was the country's trend rate of growth over this period? Which set of years most clearly demonstrates an expansionary phase of the business cycle? Which set of years best illustrates a recessionary phase of the business cycle? LO1
Answers: 2.7 percent (rounded to the nearest decimal); years 6-9; years 4 and 5. Feedback: The trend rate of growth equals the average for the 10-year period, which is 2.7 percent. (= (5 + 3 + 4 - 1 - 2 + 2 + 3 + 4 + 6 + 3) / 10). The set of years that clearly demonstrate an expansionary phase is years 6 through 9. The rate of growth is positive and increasing over this period. The set of years that best illustrate a recessionary phase is years 4 and 5. Growth is negative (declining GDP) for these years.
natural rate of unemployment (NRU)
At the NRU, the economy is said to be producing its potential output. Does not mean zero unemployment. Even when the economy is full employed, the NRU is some positive percentage because it takes time for frictionally unemployed job seekers to find open jobs they can fill. NRU can vary over time.
The "full employment rate of unemployment" is: A) zero percent B) around 5% - 6% because of frictional and structural unemployment C) around 5% - 6% because of cyclical unemployment D) considerably higher in 2011 than it was in the mid-1970s
B) around 5% - 6% because of frictional and structural unemployment Feedback: Also known as the "natural rate of unemployment," this is the rate—currently estimated at 5% - 6%—at which there is no cyclical unemployment. At full employment, there still will be frictionally and structurally unemployed workers—those entering and exiting the labor force, switching jobs, or being retrained for other jobs.
At the deepest point of the Great Depression, most unemployment consisted of: A) structural unemployment B) cyclical unemployment C) frictional unemployment D) search unemployment
B) cyclical unemployment Feedback: At its height, unemployment reached approximately 25%. Several factors led to a decline in demand for goods and services, creating cyclical unemployment.
Orlando has just finished school and is searching for his first job. Orlando is considered to be: A) structurally unemployed B) frictionally unemployed C) cyclically unemployed D) employed
B) frictionally unemployed Feedback: The frictionally unemployed include those who are searching or waiting for jobs in the near future.
In which of the following cases would real income rise? A. Nominal income rises by 8 percent, and the price level rises by 10 percent. B. Nominal income rises by 2 percent, and the price level remains unchanged. C. Nominal income falls by 4 percent, and the price level fall by 4 percent. D. Real income will rise in all of the above cases.
B. Nominal income rises by 2 percent, and the price level remains unchanged.
peak
Business activity reaches a temporary maximum with full employment and near-capacity output.
Inflation always: A) reduces both the purchasing power of the dollar and real income B) reduces the purchasing power of the dollar and increases real income C) reduces the purchasing power of the dollar but may have no impact on real income D) increases the purchasing power of the dollar and reduces real income
C) reduces the purchasing power of the dollar but may have no impact on real income Feedback: A higher price level must reduce the purchasing power of the dollar. However, whether there is an impact on real income depends on whether nominal income has kept pace. If nominal incomes rise at the same rate as the price level, real income will not change. Additionally, inflation affects different individuals' real incomes differently. Unanticipated inflation tends to hurt those on fixed incomes, for example, while benefiting debtors.
In 2010, Maxine's nominal income increased by 3% while the price level rose by 1%. Consequently, Maxine's real income: A) rose by approximately 4% B) fell by approximately 1% C) rose by approximately 2% D) fell by approximately 2%
C) rose by approximately 2% Feedback: Maxine's real income increased by the difference between the increase in her nominal income and the increase in the price level.
If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is: A. $360 billion. B. $660 billion. C. $320 billion. D. $20 billion.
C. $320 billion.
If the annual inflation rate is 5 percent a year, about how many years will it take for the price level to double? A. 10 years B. 12 years C. 14 years D. 16 years
C. 14 years
A nation has a population of 300 million people. Of these, 80 million are retired, in the military, in institutions, or under 16 years old. There are 210 million who are employed and 10 million who are unemployed. What is the unemployment rate? A. 3.3 percent B. 3.6 percent C. 4.5 percent D. 5.2 percent
C. 4.5 percent
Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is: A. Cyclical B. Frictional C. Structural D. Natural
C. Structural
Suppose the total population is 200 million workers, 100 million of whom are in the labor force. 80 million people are employed full time and another 16 million are employed part time; 5 million people are "discouraged workers." The unemployment rate is: A) 21% B) 20% C) 11% D) 4%
D) 4% Feedback: Individuals are considered employed if they work either full or part time. There are 96 million employed workers out of 100 million in the labor force, meaning 4 million are officially unemployed, for an unemployment rate of 4%. Discouraged workers are not considered members of the labor force.
A college graduate using the summer following graduation to search for a job would best be classified as: A. not officially a member of the labor force. B. a part of structural unemployment. C. a part of cyclical unemployment. D. a part of frictional unemployment.
D. a part of frictional unemployment.
The industries or sectors of the economy in which business cycle fluctuations tend to affect output the most are: A. military goods and capital goods. B. services and nondurable consumer goods. C. clothing and education. D. capital goods and durable consumer goods.
D. capital goods and durable consumer goods.
During periods of full employment the: A. burden of unemployment is quite evenly distributed among males and females, African-Americans and whites, and young and old workers. B. unemployment rate for teenagers is below the rate for the labor force as a whole. C. unemployment rate for women is considerably lower than that for men. D. unemployment rate for African-Americans is about twice the rate for whites.
D. unemployment rate for African-Americans is about twice the rate for whites.
hyperinflation
Extraordinarily rapid inflation. Causes speculation, reckless spending, more inflation; Devastates an economy; Businesses don't know what to charge; Consumers don't know what to pay; Money becomes worthless - move to barter system.
(who is hurt by inflation?)
Fixed-income receivers; Savers; Creditors
(who is unaffected or helped by inflation?)
Flexible-income receivers, Debtors
Okun's law
For every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs. With this information we can calculate the absolute loss of output associated with any above-natural unemployment rate.
labor force
People who are willing and able to work. Employed and unemployed (does not include those under 16 and/or institutionalized or those not in the labor force (full time college students, stay at home parents, retirees)).
nominal interest rate
Percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectation of inflation, if any. Nominal interest rate = real interest rate + inflation premium (the expected rate of inflation)
Cost-push inflation occurs when there is ________________. Excess demand for goods and services. A trade deficit. Excess inventory. Rising per-unit production costs.
Rising per-unit production costs.
How is the labor force defined and who measures it? The U.S. Bureau of Employment (USBE) measures the labor force as people over 16 years of age who are actively seeking work. The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work. The U.S. Labor Commission (USLC) measures the labor force as people over 18 years of age who are actively seeking work. The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 18 years of age who are actively seeking work.
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work.
The unemployment rate that is consistent with full employment is known as __________________. Cyclical unemployment. The natural rate of unemployment. The status quo rate of unemployment. Okun's rate of unemployment. The unnatural rate of unemployment.
The natural rate of unemployment.
full-employment rate of unemployment
The unemployment rate that is consistent with full employment. Also called the natural rate of unemployment (NRU).
The noneconomic effects of unemployment include a sense of failure created in parents and in their children. the additional expense of helping unemployed family members. unemployment benefits that are paid. the costs of moving for unemployed persons.
a sense of failure created in parents and in their children.
Unemployment is an economic problem because there are additional expenses of helping unemployed family members. a unit of labor resource that could be engaged in production is sitting idle. there are costs of moving for unemployed persons. unemployment benefits are paid.
a unit of labor resource that could be engaged in production is sitting idle.
The average length of time people are unemployed rises during a recession because unemployment compensation is equal to what people would earn if they were working. retraining takes longer during recessions. businesses continue to lay-off workers as a result of the decrease in demand. most workers receive unemployment compensation and don't want to work.
businesses continue to lay-off workers as a result of the decrease in demand.
If the unemployment rate increases, the size of the labor force must increase. could increase or decrease. will not change. must decrease.
could increase or decrease.
The increase in unemployment that occurs during recession and depression is called:
cyclical unemployment
A difficult aspect of measuring the unemployment rate is determining who is eligible and available to work. making sure all adults are included. each state uses a different process. the survey response rate is so low.
determining who is eligible and available to work.
Hyperinflation might lead to a severe decline in total output if everyone starts speculating and searching for ways to avoid inflation. everyone starts spending more to avoid inflation. taxes go up so that income falls. people save more because interest rates are falling.
everyone starts speculating and searching for ways to avoid inflation.
The long-run trend of the US economy is:
expansion and growth
The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing nondurables because capital goods and durable goods last and these purchases cannot be postponed. are expensive and require regular payments. last and these purchases can be postponed. do not last and these purchases cannot be postponed.
last and these purchases can be postponed.
Inflation reduces the export power of the dollar. reduces the purchasing power of the dollar. increases the purchasing power of the dollar. lowers interest rates.
reduces the purchasing power of the dollar.
The unemployment rates for men and women are normally:
similar
A positive unemployment rate—one more than zero percent—is fully compatible with full employment because at full employment, unemployment includes seasonal unemployment, which is usually positive because people are transitioning to new jobs. unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs. the economy is producing at capacity. there is usually some unemployment due to the business cycle.
unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs.
The length of a complete cycle is generally about 3 years. has lengthened and then shortened in the past 25 years. varies from about 1 to 2 years to as long as 5 years. varies from about 2 to 3 years to as long as 15 years.
varies from about 2 to 3 years to as long as 15 years.