Chapter 9 Quiz

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?

10%

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?

10%

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?

12%

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?

7%

Which of the following illustrates the difficulty of distinguishing between frictional, structural, and cyclical unemployment?

A person quits his job in search of a better one, but the former job is in a declining industry and disappears completely

The noneconomic effects of unemployment include

A sense of failure created in parents and in their children

Unemployment is an economic problem because

A unit of labor resource that could be engaged in production is sitting idle

In general, unemployment rates are higher for

African Americans, Hispanics, workers in lower-skilled occupations, and less-educated workers

The average length of time people are unemployed rises during a recession because

Businesses continue to lay-off workers as a result of the decrease in demand

The Consumer Price Index (CPI) is constructed by

Comparing the value of a "market basket" of goods that consumers typically purchase to the value of the basket in a base year

Economists agree that ____ inflation reduces real output.

Cost-push

A negative GDP gap is associated with

Cost-push inflation

If the unemployment rate increases, the size of the labor force

Could increase or decrease

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. A recession causes a local factory to lay off 30 workers

Cyclical unemployment

____ means that the price level is falling, whereas with ____, overall prices are rising.

Deflation, Inflation

A positive GDP gap is associated with

Demand-pull inflation

A difficult aspect of measuring the unemployment rate is

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

A financial crisis can lead to a recession because it can cause wealth and income to ____, reducing spending and ultimately reducing employment.

Fall

Lenders are helped by unanticipated inflation. True or False?

False

The losers from inflation are those with

Fixed incomes in nominal terms

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Tim just graduated and is looking for a job

Frictional unemployment

A major new invention can lead to an expansion if there are ____ in investment, consumption, output, and employment.

Increases

Reduces the purchasing power of the dollar

Inflation

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 can be postponed

An increase in your nominal income and a decrease in your real income can occur simultaneously if your nominal income increases ____ than the cost of living increases.

Less

Those who lose the most from unemployment are

Minority groups and those with the least skill

The nominal interest rate

Minus the inflation rate is the real interest rate

The consequence of a ____ GDP gap is that what is not produced is lost forever and future economic growth will be less

Negative

The unemployment rate is the

Number of unemployed persons divided by the labor force

Consider the choice between (a) full employment with a 6 percent annual rate of inflation or (b) price stability with an 8 percent unemployment rate. Which of the following statements is true?

Option (a) risks inflationary expectations that will give rise to creeping inflation, whereas option (b) might lower spending and push the economy toward deflation

In sequential order, the four phases of the business cycle are

Peak, recession, trough, and expansion

Demand-pull inflation occurs when

Prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output

Seasonal variations and long-run trends complicate the measurement of the business cycle because normal season variation does not signal boom or ____.

Recession

Cost-push inflation occurs when there is:

Rising per-unit production costs

The United States has an unemployment compensation program that provides income for those out of work. Unemployment is

Still a problem because the unemployment compensation program merely gives the unemployed enough funds for basic needs

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India

Structural unemployment

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Thousands of bus and truck drivers permanently lose their jobs when driverless, computer-driven vehicles make human drivers redundant

Structural unemployment

The Bureau of Labor Statistics (BLS) would calculate the rate of inflation in year 5 by

Subtracting the CPI of year 4 from the CPI of year 5, and then dividing by the CPI of year 4

How is the labor force defined and who measures it?

The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are actively seeking work

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

The unemployment rate that is consistent with full employment is known as:

The natural rate of unemployment

A positive unemployment rate—one more than zero percent—is fully compatible with full employment because at full employment,

Unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs

The length of a complete cycle

Varies from about 2 to 3 years to as long as 15 years