Macroeconomics: Unit 3

Which of the following is the best example of frictional unemployment?

Heather recently graduated with her doctorate in economics. She is searching for a job that matches her skills.

Which of the following is a case of cyclical unemployment?

Garrett lost his job after the company closed during last year's recession

High and volatile inflation:

destroys the ability of market prices to send signals about the value of resources and opportunities.

(Table: Labor Data) According to the accompanying labor data, the unemployment rate is:

7.5%

If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, then real output growth will be:

-1%

(Table: Unemployment Statistics for Country X) Using the data in the table, what is the natural unemployment rate for this country in the year 2005?

2.9%

(Figure: Labor Market) Refer to the figure. If this market is initially in equilibrium when a $10 minimum wage is imposed, the quantity of labor employed will fall by:

20

(Table: Anticipating Inflation) Using the inflation data in the table above, assume that all loan contracts have fixed nominal interest rates of 10% and mature after one year. Which year did lenders gain relative to borrowers?

2003

A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's underemployment rate?

25%

Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the 1-year period. What is the real interest rate that Taylor paid?

3%

(Figure: Aggregate Demand) Point B on this aggregate demand curve represents an inflation rate of:

4%

For an aggregate demand curve with __ =10% AND ___ = 0%, if inflation is 6%, then real growth is:

4%

If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be:

4.00

(Figure: Labor Supply and Demand) Refer to the figure. What is the unemployment rate caused by the labor union's action to increase its wage demands to $11 an hour?

40%

(Table: Employment, Unemployment, and Labor Force Participation) Refer to the table. What is the unemployment rate of the country in 2010?

5%

(Figure: Labor Market) Refer to the figure. What is the unemployment rate in this market as a result of the implementation of a $10 minimum wage?

50%

A country has a population of 160 million. Thirty million of its people are under the age of 16 and 10% of the population is either in the military or institutionalized. Seventy million people have jobs, and five million are looking for work. What is the labor force participation rate in this country?

66%

A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's labor force participation rate?

66.7%

(Figure: Labor Supply and Demand) Refer to the figure. How much will the quantity of labor employed decline as a result of the labor union's action to increase its wage demands to $11 an hour?

700

On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at:

8%

If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate between years 1 and 2 will be:

8.33%

If the adult population of a country is 200 million, 100 million are employed, and 10 million are unemployed, this country's unemployment rate is:

9.1%

In a country where both the labor force participation rate and the unemployment rate are very low, which of the following answers explains why this may be the case?

A large percentage of the population is aging and thus has retired

Imagine that a government starts out with the budget surplus. If in the next period the government temporarily runs a budget deficit, what would you expect to happen to aggregate demand?

AD would increase

How might changes in the money supply be non-neutral in the short run?

As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels.

Consider countries A and B. In country A the minimum wage is 30% of the median wage, and in country B the minimum wage is 60% of the median wage. As a result, the minimum wage will affect more workers in country _____ and create more unemployment in country _____.

B;B

When the expected rate of inflation is higher than the actual rate of inflation, wealth is:

C. redistributed from borrowers to lenders.

Which two nations have a high percentage of older workers participating in the labor force?

Japan and the United States

Which of the following is considered unemployed?

John, on temporary layoff from his work, awaits recall.

How might changes in marginal tax rates on married couples affect labor force participation rates?

Lower marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner

(Figure: Oil Market Diagrams) Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts the cause of the rises in the price of oil in the early 2000s?

Panel D

As a result of an increase in expected inflation, the:

SRAS curve shifts up and to the left

Which of the following statements highlights the difference between the CPI (consumer price index) and the GDP deflator?

The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy.

A country's total civilian noninstitutionalized adult population is 1 million, and 500,000 people in this country are working, with another 20,000 people looking for work. Which of the following statements about the labor force statistics in this country is accurate?

The employment rate is 96.15% and the labor force participation rate is 52%.

Which of the following is NOT true regarding the natural rate of unemployment?

The natural rate of unemployment correlates positively with the level of GDP growth in an economy

Which of the following best describes the effects of a major labor union that maintains a union wage above the market wage?

The quantity of labor supplied exceeds the quantity of labor demanded, and the unemployment rate increases

Which of the following is a case of frictional unemployment?

Timothy is looking for a job where he can apply his expertise in computer programming

Why is the SRAS curve steeper above its intersection with the long-run aggregate supply curve?

Wages are less sticky in the upward direction

Which of the following is a negative real shock that occurred during the Great Depression?

Widespread bank failures led to reduction in the productivity of financial intermediation

Which of the following is an example of money illusion assuming that inflation is 5%?

You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.

In the basic model that includes the AD and LRAS curves only, increased spending growth causes:

a higher inflation rate, but no change in the real growth rate

A minimum wage is:

a labor market price floor

Which of the following causes a shift of the AD curve to the right?

an increase in consumer confidence

If wages are not as flexible as prices in the AD-AS model, an increase in money growth will lead to:

an increase in inflation and in the profits of firms

According to the textbook, one major reason for the increase in the female labor force participation rate after World War II was:

an increase in the incentive to work

1. From an initial equilibrium in the AD -AS model, an increase in consumption growth will initially cause inflation:

and real growth to increase

If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP:

are impossible because real GDP must also be fixed

In the basic model that includes the AD and LRAS curves only, aggregate demand shocks caused by changes in the growth of money supply:

are neutral in both the short run and long run

Inflation refers to an increase in the

average level of prices

(Table: Unemployment Statistics for Country X) Using the data in the table, Country X is likely to be in a recession in:

both 1995 and 2005

(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience disinflation?

both 2007 and 2009

The main reason(s) for the slope of SRAS is:

both sticky prices and sticky wages

An unexpected increase in money growth leads to increased inflation in:

both the short run and the long run

The real business cycle (RBC) model implies that:

business cycles are driven by real shocks to the economy

To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to:

calculate real wages in both 1950 and today.

If the equilibrium wage is $9 in the market for hotel workers and $8 in the market for restaurant workers and both markets have similar elasticities of labor supply and demand, then a minimum wage of $10 in both markets will:

cause more unemployment among restaurant workers than restaurant workers

Because of money illusion, inflation usually confuses:

consumers, workers, and firms

Which type of unemployment is likely to be higher when real GDP growth is lower?

cyclical unemployment

Higher implicit tax rates tend to cause force participation rates to:

decrease

If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005.

decreased

Suppose the average level of prices increased from 100 to 110 between 2007 and 2008, and from 110 to 115 between 2008 and 2009. Between 2008 and 2009, there was:

disinflation

When disinflation arises unexpectedly, the real interest rate will _____ the equilibrium rate, which will benefit _____.

exceed; lenders and harm borrowers

If spending grows by 3%, real GDP grows by 5%, and velocity is stable, then prices will be _____ at a rate of _____ according to the aggregate demand curve.

falling; 2%

If π < π e:

firms will reduce their outputs

In response to a negative oil price shock, real GDP growth:

first falls and then rises back to its initial level

The AD-AS model is most useful for explaining what causes:

fluctuations in GDP growth around its trend rate.

Structural unemployment is more persistent in France than in the United States because:

french workers have less incentive to quickly seek a new position since their unemployment benefits are much higher

Several years ago, the rising popularity of Barnes & Noble and Borders shifted workers from independent bookshops to larger chains. What type of unemployment was associated with this reallocation of the work force?

frictional unemployment

If the equilibrium wage is $9 in the market for hotel workers and $8 in the market for restaurant workers and both markets have similar elasticities of labor supply and demand, then a minimum wage of $4 in both markets will:

have no effect in either market

When we examine data from different countries, higher money growth has consistently been associated with:

higher inflation

The implicit tax on working is less than 1% in the United States and over 2% in Belgium. Given this, we would expect:

higher labor force participation in the United States

For a given nominal interest rate, an increase in deflation will cause the real rate of interest to:

increase

If a national government improves its unemployment benefits, its unemployment rate will most likely:

increase

sticky wages and prices

increase the impact of positive shocks.

In the AD -AS model, an unexpected increase in the growth rate of the money supply:

increases both the inflation and real growth rates in the short run

Debt monetization means that a government pays off its debt by:

increasing the money supply.

The quantity theory of money is a theory of:

inflation

Which of the following is true of the natural unemployment rate?

it is higher if structural or frictional unemployment is higher

Which of the following is a problem with deflation?

it raises the real cost of debt repayment

Current forecasts say that mild inflation is expected next year. If, however, deflation occurs instead:

lenders on existing fixed rate loans will gain while borrowers will lose

If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be:

less than the equilibrium rate

If the economy experiences unexpected inflation, then the real interest rate will be _____ than its equilibrium rate, and wealth will be distributed from _____.

less; lenders to borrowers

If the median wage is $9 in country X and $8 in country Y and both countries have similar elasticities of labor supply and demand, then a minimum wage of $4 in both countries will tend to:

make unemployment higher in country Y than in country X

Money illusion is a condition in which people:

mistakenly confuse changes in nominal prices for changes in real prices.

According to the quantity theory, what causes inflation in the long run?

money supply growth

(Figure: Two SRAS Curves) The figure shows the AD -AS model with two SRAS curves. If the economy is initially at Point A and expected inflation rate remains unchanged, the economy can achieve a real GDP growth rate of 9% only by:

moving along SRAS1 to Point B

The quantity theory of money implies that the money supply times the velocity of money equals:

nominal GDP

Deflation can cause the economy's aggregates demand curve to shift inward because debt contracts are:

not adjusted for inflation

A positive real shock causes the aggregate demand curve to:

not shift at all

A temporary positive shock to spending growth will lead to an increase in:

output and prices in the short run, but no change in either in the long run.

Why could very high rates of inflation cause velocity to increase?

people will spend it

Higher levels of unemployment benefits and employment protection:

raise structural unemployment

For a tax system in which higher income earners pay a larger share of their incomes in taxes, a higher inflation rate:

raises the tax burden of taxpayers.

Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused:

real growth to increase and inflation to decrease

Which of the following is NOT consistent with points along the long-run aggregate supply curve?

real output growth is negatively related to inflation

According to the quantity theory of money, an increase in the money supply will cause the price level to:

remain relatively constant since money is neutral

An increase in expected inflation will cause the economy's aggregate demand curve to:

remain unchanged

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real of price milk between 2000 and 2010:

remained the same

When workers lose their jobs and become officially unemployed, the number of people in the labor force:

remains constant

If spending grows by 3% while real growth is 1% and velocity is stable, then prices will be _____ at a rate of _____ according to the aggregate demand curve.

rising; 2%

Money illusion occurs when people

see changes in nominal prices and mistake them for changes in real prices.

A decrease in spending growth will cause the economy's aggregate demand curve to:

shift to the left

The lowering of the growth rate of the money supply is represented graphically by a:

shift to the left of the AD curve

During the Great Depression, the long-run aggregate supply curve:

shifted inward

Sticky wages and prices are incorporated in the AD -AS model by the:

short-run aggregate supply curve

The shift toward more of a service economy and less of a manufacturing economy in the United States has caused an increase in:

structural unemployment

Which of the following elements reduces structural unemployment?

the enhancement of worker retraining programs

The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of:

the government monetizing its debt

If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated?

the growth rate is higher than the Solow growth rate

The text states, "inflation is a type of tax." This tax refers to _____ when inflation occurs.

the lower purchasing power of money

In the quantity theory of money, growth of _____ is the cause of inflation.

the money supply

The quantity theory of money predicts that the main cause of inflation is increases in:

the money supply

The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with:

the quantity theory of money

An unexpected outward shift of the economy's AD curve will cause real GDP growth to increase in:

the short run only

An increase in the rate of expected inflation causes:

the short-run aggregate supply curve to shift up

1. The long-run aggregate supply curve is represented by a vertical line at the Solow growth rate because:

there is an underlying assumption of long-run money neutrality

Why do we use the "real" prices of goods to measure how expensive things have become?

to see whether there have been any changes in our purchasing power

The presence of discouraged workers causes the measured unemployment rate to be:

understated

In the AD -AS model, money is not neutral in the short run if:

wages and prices are sticky

Which of the following correctly represents deflation?

π < 0