ECON chapter 5

Suppose James and Frank both retire this year. For income from retirement, James will rely on a pension from his company that pays him a fixed $2,500 per month for as long as he lives. James hasn't saved anything for retirement. Drank has no mention but has saved a considerable amount, which he has invested in certificates of deposit (CDs) at his bank. Currently Frank's CDs pay him interest of $2,300 per month. (A) ten years from now, a. James will have a higher real income since he has a higher nominal income and their incomes are not adjusted for inflation. b. James will have a higher real income because he is subject to a lower CPI than Frank. c. Frank will have a higher real income since he has a lot of money invested in CDs. d. Frank will have a higher real income although he has a lower nominal income because his interest income is likely to increase with inflation. (B) now suppose instead of being a constant amount, James pension increases each year by the same percentage as the CPI. For example, if the CPI increases by 5 percent in the first year after James retires, then his pension in the second year equals $2,500+($2,500x0.05)=$2,625. In this case, 10 years from now, a. Frank will have a higher real income because he has substantial savings. b. James will have a higher real income because he has a higher nominal income and his income is dexter with the CPI. c. Frank will have a higher real income since his interest income is compounded over time. d. James will have a higher real income because it is his pension payment.

(A) d (B) b

Suppose an economy is given by the following: Population= 260 million Labor force= 169 million The number of people employed= 159.7 million The number of people unemployed= 9.3 million Given the info above, what is the unemployment rate?

(number of unemployed/ labor force)x100 (9.3/169)x100 5.5%

Suppose an economy has an inflation rate of 3.3% and a bank makes a loan with an interest rate of 6.1% In this case the real interest rate is ____%

2.8 nominal interest rate - inflation rate 6.1-3.3= 2.8

In 1924, the famous novelist F. Scott Fitzgerald wrote an article for the Saturday Evening Post titled "How to live on $36,000 a Year" in which he wondered how he and his wife had managed to spend all of that very high income without saving any of it. In 1924, the consumer price index (CPI) was 17, and the CPI in 2008 was 215. The income you would have needed in 2008 to have had the same purchasing power that Fitzgerald's $36,000 had in 1924 is $________.

Value in 2008 dollars= value in 1924 dollars x( CPI in 2008/ CPI in 1924) 36,000x(215/17)= $455,294

During the 1990's, Japan experienced periods of delation and low nominal interest rates that approached zero percent. why would lenders of funds agree to a nominal interest rate of almost zero percent? The lenders of funds agreed to a minimal interest rate of almost zero percent because, with deflation, a. real interest rate = nominal interest rate + inflation rate; this the real interest rate will be higher than the nominal interest rate. b. real interest rate = nominal interest rate + inflation rate; this the real interest rate will be lower than the nominal interest rate. c. nominal interest rate = (real interest rate/ inflation rate); thus the nominal interest rate will be higher than the real interest rate. d. real interest rate = (nominal interest rate/ inflation rate); thus the real interest rate will be lower than the nominal interest rate.

a

If inflation is expected to increase, a. the nominal interest rate will increase. b. the nominal interest rate will remain the same. c. the real interest rate will decrease. d. the nominal interest rate will decrease.

a

Indicate whether the following statement is true or false and why "A wage rising slower than the rate of inflation is actually falling." a. True. if wages are increasing than the average price of goods and services, purchasing power falls. b. False. a higher wage increases purchasing power regardless of inflation. c. True. if wages are increasing slower than the average price of goods and services, purchasing power increases. d. False. a higher wage decreases purchasing power regardless of inflation.

a

The difference between the nominal interest rate and the real interest rate is a. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate. b. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate divided by the inflation rate. c. the real interest rate is the stated interest rate whereas the nominal interest rate is the real interest rate minus the inflation rate. d. the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate plus the inflation rate.

a

What is typical of the length of unemployment in the modern (post-great depression) US economy? a. unemployment lasts less than 6 months. b. unemployment lasts longer than one year and less than three years. c. people remain unemployed for years at a time. d. none of the above

a

Which of the following choices shows how data on nominal wages for 2007 to 2013 and data on the consumer price index for the same years can be used to calculate the real wages for these years? a. (nominal wages/ price index) x 100= real wages b. nominal wages- rate of inflation= real wages c. nominal wages + price index= real wages d. nominal wages x price index= real wages

a

the difference between a nominal variable and a real variable is that a. nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation. b. real variables are calculated in current-year prices and the nominal variables are measured in dollars of the base year to adjust for the effects of inflation. c. nominal variables are economic variables that are adjusted for inflation, whereas real variables are valued in today's dollars. d. real variables are divided by the price index and multiplied by 100 to obtain nominal variables.

a

An efficiency wage a. decreases the unemployment rate since it increases the labor productivity. b. increases the unemployment rate since firms pay a higher-than-market wage that increases the quantity of labor supplied. c. has no impact whatsoever on the unemployment rate. d. decreases the unemployment rate since firms pay a lower higher-than-market wage that decreases the quantity of labor supplied.

b

Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because a. the economy always experiences cyclical unemployment even if the economy were operating at the full-employment level of output. b. the economy needs some short-term unemployment in order to allow for better matching of jobs with workers that posses the proper skill sets. c. workers lose jobs due to changes in output of goods and services in the economy. d. many people retire each year and therefore they become unemployed making changes to the unemployment rate.

b

Menu costs are a. the costs of variable inputs in the long run. b. the costs to firms of changing prices. c. the costs of fixed inputs in the short run. d. the same as sunk costs.

b

Since nominal incomes increase with inflation, a. unexpected inflation does not affect the purchasing power of the average consumer b. expected inflation does not affect the purchasing power of the average consumer c. expected inflation increases the purchasing power of the average consumer d. expected inflation reduces the purchasing power of the average consumer

b

Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. what is the best classification for his time as an unemployed truck mechanic? a. structurally unemployed b. cyclically unemployed c. frictionally unemployed d. seasonally unemployed

b

Suppose that the inflation rate turns out to be much lower than most people expected. In that case, a. both borrower and lender will gain from the situation. b. a borrower will lose from the situation while a lender will gain. c. A lender will lose from the situation while a borrower will gain. d. both borrower and lender will lose in this situation.

b

The employment-population ratio measure the a. portion of the total population that is employed b. percentage of the working age population that is employed c. percentage of the working age population that is in the labor force. d. percentage of the working age population that is not employed.

b

The following appeared in a newspaper article: "Inflation in the Lehigh Valley during the first quarter of the year was less than half the national rate... So, unlike much of the nation, the fear here is deflation-when prices sink so low that CPI drops below zero." Do you agree with the reporter's definition of deflation? a. yes, when prices fall too low the CPI is negative b. no, deflation is defined as a negative inflation rate c. no deflation occurs when the nominal interest rate is greater than the real interest rate d. yes, deflation is caused by a negative CPI

b

The natural rate of unemployment is a. the sum of cyclical unemployment and frictional unemployment b. the sum of structural unemployment and frictional unemployment c. the sum of seasonal unemployment and cyclical unemployment d. the sum of structural unemployment and cyclical unemployment

b

The price index which is used to measure changes in the cost of living is the a. GDP Deflator b. Consumer Price Index (CPI) c. Producer Price Index (PPI) d. Retail Price Index

b

The type of inflation that is a greater problem to society is a. unanticipated inflation, since it has some costs associated with it, such as menu costs. b. unanticipated inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future. c. anticipated inflation because the purchasing power of the dollar falls very rapidly d. anticipated inflation, since people have to pay taxes on the higher nominal income even though the real income has not changed.

b

The unemployment rate: a. shows the percentage of the population that is considered unemployed b. shows the percentage of the labor force that is considered unemployed c. is the amount of the labor force that is not working d. is the amount of people in the population that are not working

b

When an unemployed person drops out of the labor force, the unemployment rate: a. is not affected by the existence of such workers. b. understates the true degree of joblessness in the economy. c. overstates the true degree of joblessness in the economy. d. becomes more reliable as all potential erroneous data are removed.

b

Which groups tend to have above-average unemployment rates, and which groups tend to have below-average unemployment rates? Consider the following choices: which is not accurate? a. white adults have below-average unemployment rates. b. black teenagers as a group have lower unemployment rates than white teenagers c. black adults have above-average unemployment rates. d. generally, teenagers as a group have higher unemployment rates than adults.

b

Which of the following best describes a current trend in the labor force participation rate? a. it is decreasing for both men and women. b. it is decreasing for men and increasing for women. c. it is increasing for men and decreasing for women. d. is is increasing for both men and women.

b

During a recession, a person would prefer to work in an industry that produces a. normal goods because the demand for normal goods should increase with decreases in income during a recession b. normal good because the demand for normal goods should increase with increases in income during economic expansion c. an inferior good because the demand for inferior goods should increase with decreases in income during a recession d.an inferior good because the demand for inferior goods should decrease with increases in income during a recession

c

During an economic expansion, a person would prefer to work in an industry that produces a. an inferior good because the demand for inferior goods should increase with decreases in income during economic downturn. b. an inferior good because the demand for inferior goods should increase with increases in income during economic downturn. c. a normal good because the demand for normal goods should increase with increases in income during economic expansion. d. a normal good because the normal goods industry usually pays higher wages during economic expansion.

c

In calculating the consumer price index for the year, the BLS uses the quantities in the market basket, rather than the quantities purchased during the current year. This gives rise to a. outlet bias b. new product bias c. substitution bias d. an increase in quality bias

c

Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status? a. structurally unemployed b. cyclically unemployed c. frictionally unemployed d. seasonally unemployed

c

The chapter explains that is it impossible to know whether a particular nominal interest rate is "high" or "low" because a. it all depends on the Fed's monetary policy rule. b. it all depends on the federal funds rate. c. it all depends on the inflation rate. d. it is controlled by the Fed's open market operations.

c

The real interest rate a. is the interest rate that adjusts GDP for changes in prices b. is the interest rate that is quoted on a financial debt and a firm's assets c. is equal to the nominal interest rate minus the inflation rate d. is equal to the inflation rate minus the nominal interest rate.

c

The unemployment rate is calculated as follows: a. Unemployment rate= (# of unemployed/ population) x 100 b. Unemployment rate= (# of unemployed/# of employed + labor force) x 100 c. Unemployment rate= (# of unemployed/ labor force) x 100 d. Unemployment rate= (# of unemployed/ # of employed) x 100

c

When an unemployed person drops out of the labor force, it a. does not affect the labor force participation rate. b. does not affect the unemployment rate. c. does not affect the employment-population ratio. d. affects the employment-population ratio.

c

Which of the following can give an early warning of future increases in the price level? a. Consumer Price Index b. GDP deflator c. Producer Price Index d. All of the Above

c

between the household survey and establishment survey, many economists prefer: a. the establishment survey b/c it can predict future stock prices of the complains it surveys b. the household surgery because it gives data on unemployed and self-employed individuals. c. the establishment survey b/c it is determined to be actual payroll records rather than unverified answers. d. the household survey b/c it provides a large sample of the population and so is more inclusive.

c

When a company reduces production and employment during economic recessions, those employees who lose their jobs are generally considered to be

cyclically unemployed

Economists do not define full employment as being an unemployment rate equal to zero since a. only structural unemployment is zero b. only frictional unemployment is zero c. total unemployment is zero d. only cyclical unemployment is zero

d

In June 2013, Apple introduced a new model of their MacBook Air lightweight laptop computer. The new model had a faster processor and much better battery life than the previous model, but sold for the same price. How was the CPI affected by the introduction of the new model of the MacBook Air? If Apple's new MacBooks offer more features for the same price as the previous model, how was the consumer price index affected by the introduction of the new MacBook Air? a. the CPI decreases due to the new product bias b. the CPI increases due to the substitution bias c. the CPI increases due to the increase in quality bias d. the CPI does not change

d

Nominal income generally increase with inflation because a. even anticipated inflation causes average nominal incomes to fall as prices increase b. when inflation is anticipated, real incomes also increase by the same percentage as inflation c. when inflation is unanticipated, average nominal incomes also increase by the same percentage as inflation d. when inflation is anticipated, average nominal incomes also increase by the same percentage as the rate of inflation

d

Real income is defined as the following a. real income = (nominal income + CPI current year/ 100) b. real income= nominal income x CPI current year x 100 c. real income = nominal income - rate of inflation d. real income = (nominal income/ CPI current year) x 100

d

The minimum wage law a. increases the unemployment rate among highly skilled workers. b. increases cyclical unemployment in the economy. c. has a significant effect on the unemployment rate since a large part of the labor force earns the minimum wage. d. has only a small effect on the unemployment rate since only a small part of the labor force earns the minimum wage.

d

When an economy is at full employment, unemployment is equal to a. zero b. normal rate of unemployment - abnormal rate of unemployment c. cyclical unemployment - seasonal unemployment d. the natural rate of unemployment

d

Which of the following depicts an accurate description of the household survey and the establishment survey? a. the household survey interviews households and measures the employment rate whereas the establishment surgery interviews self-employed people and measures the unemployment rate. b. the household survey interviews retired individuals and measures the unemployment rate whereas the establishment survey interviews working population and measures the employment rate. c. the household survey conducts surveys of small companies and measures the employment and the unemployment rate whereas the establishment survey interviews big establishments and measures the unemployment rate. d. the household survey interviews households and measures the unemployment rate whereas the establishment survey interviews businesses and measures the employment rate.

d

Which of the following is not a cost created by high inflation? a. inflation causes the real interest rate to change which can make it more difficult to borrow an blend money. b. inflation changes firms' prices which causes firms to have to use resources to physically change the marketed prices, often referred to as menu costs. c. inflationary impacts are not distributed evenly across the population, therefore, inflation causes the economy to redistribute income acres households. d. inflation causes the real wage to fall which means that firms have to pay more for workers.

d

Which of the following is not a measure of the price level? a. Consumer price index: an average of the prices of goods and services a typical family of four would purchase b. Producer price index: an average of prices received by firms for goods and services at all stages of production c. GDP deflator: broadest measure of the average price level as it includes prices of every final d. Government price index: an average of the prices paid by the government for goods and services used only by different government agencies.

d

Which of the following is not one of the conditions someone needs to meet to be counted as unemployed a. they must not have worked in the week previous to the survey week. b. they were available for work in the week previous to the survey week. c. they had actively looked for work at some time during the previous four weeks. d. they had worked only one hour per week during the previous four weeks.

d

Your father earned $34,000 per year in 1984. To the nearest dollar, which is that equivalent to in 2008 if the CPI in 2008 is 215 and the CPI in 1984 is 104? a. $16,447 b. $73,100 c. $34,000 d. $70,288

d 34,000x(215/104)

As output (GDP) is increasing, the amount of cyclical unemployment would

decrease

a person who is in between jobs but actively engaged in a job search is considered to be

frictionally unemployed

the internet has _________ the size of menu costs

reduced

The effect of labor unions on overall unemployment is _______ since only a ______ percentage of the labor force outside the government is unionized.

small; small

Experts in hand-drawn animation who remain unemployed due to the film industry's switch to computer-generated animation are considered to be

structurally unemployed