Economics Principles, Applications And Tools 8th Edition by Arthur O’Sullivan – Test Bank A+

Description

6.1 Examining Unemployment

1) The presence of unemployment in the labor market implies that:

1. A) at the current wage, there are people who want to work but cannot find work.
2. B) people are not willing to work at the current wage.
3. C) there are some people who will not work at the current wage.
4. D) there is excess demand in the labor market.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

2) A person who is currently actively looking for a job, but has not found a job is classified by the BLS as:

1. A) unemployed.
2. B) employed.
3. C) not in the labor force.
4. D) under 16.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

3) A person who is currently actively looking for a job, but has a job that pays for 5 hours a week only is classified by the BLS as:

1. A) unemployed.
2. B) employed.
3. C) not in the labor force.
4. D) under 16.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

4) A worker who currently is not working, but is not looking for a job is considered as:

1. A) employed.
2. B) unemployed.
3. C) not in the labor force.
4. D) in the labor force.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

5) The unemployment rate equals:

1. A) labor force/population.
2. B) unemployed/employed.
3. C) (employed – unemployed)/labor force.
4. D) (labor force – employed)/labor force.

Answer: D

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6) An increase in the labor force, without a corresponding increase in the number of employed workers will cause the:

1. A) unemployment rate to increase.
2. B) the labor force participation rate to decrease.
3. C) unemployment rate to decrease.
4. D) the population growth rate to increase.

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

7) If the number of unemployed increases by the same number as the number of people in the labor force, then:

1. A) the unemployment rate will increase.
2. B) the labor force participation rate will decrease.
3. C) the unemployment rate will decrease.
4. D) the population growth rate will increase.

Answer: A

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

8) Suppose the unemployment rate is currently at 5 percent. If the number of unemployed increases by the same number as the number of people unemployed, then:

1. A) the unemployment rate will increase.
2. B) the labor force participation rate will decrease.
3. C) the unemployment rate will decrease.
4. D) the population growth rate will increase.

Answer: A

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

9) Bob is unemployed if he:

1. A) is temporarily laid off.
2. B) is not looking for a job.
3. C) looked for a job for two months and then quit looking.
4. D) A and C are correct.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

10) Janie graduated from college a month ago and is now without work. She accepted a job that will start next month. Today, Janie is:

1. A) not in the labor force.
2. B) in the labor force.
3. C) employed.
4. D) a discouraged worker.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

11) Janie graduated from college a month ago and is now without work. She accepted a job that will start next month. Today, Janie is:

1. A) not in the labor force.
2. B) employed.
3. C) unemployed.
4. D) a discouraged worker.

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

12) The number of people unemployed equals:

1. A) the number of people employed minus the labor force.
2. B) the labor force plus the number of people employed.
3. C) the labor force minus the number of people employed.
4. D) the number of people employed divided by the labor force.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

13) Carla lost her job and immediately started looking for another job. As a result the:

1. A) unemployment rate increases.
2. B) labor force increases.
3. C) labor force decreases.
4. D) unemployment rate remains constant.

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.1

14) Refer to Table 6.1. The labor force equals:

1. A) 14,000.
2. B) 16,000.
3. C) 13,500.
4. D) 16,500.

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

15) Refer to Table 6.1. The unemployment rate is:

1. A) 9.09%.
2. B) 18.5%.
3. C) 15.2%.
4. D) 22.7%.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

16) Refer to Table 6.1. The labor force participation rate is:

1. A) 82 percent.
2. B) 18 percent.
3. C) 63 percent.
4. D) 37.5 percent.

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.2

17) Refer to Table 6.2. The total number of people unemployed is:

1. A) 7.58 million.
2. B) 10.5 million.
3. C) 6.83 million.
4. D) 73.5 million.

Answer: C

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

18) Refer to Table 6.2. The total number of people employed is:

1. A) 129.67 million.
2. B) 128.92 million.
3. C) 73.5 million.
4. D) 199.5 million.

Answer: A

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

19) Which of the following is correct? The unemployment rate is:

1. A) (unemployed/population) x 100.
2. B) ((employed – unemployed)/labor force) x 100.
3. C) ((labor force – employed)/labor force) x 100.
4. D) ((employed – labor force)/employed) x 100.

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

20) The number of people classified as employed is 220,000 and the number of people classified as unemployed is 30,000. The size of the labor force:

1. A) equals 200,000.
2. B) equals 250,000.
3. C) equals 300,000.
4. D) cannot be determined from this information.

Answer: B

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

21) The number of people classified as employed is 550,000 and the number of people in the labor force is 700,000. The total number of people classified as unemployed is:

1. A) 200,000.
2. B) 110,000.
3. C) 150,000.
4. D) 1.5 million.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

22) If the number of people classified as unemployed is 50,000 and the number of people classified as employed is 250,000, what is the unemployment rate?

1. A) 8%
2. B) 8.7%
3. C) 16.67%
4. D) 20.0%

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

23) If the number of people classified as unemployed is 50,000 and the number of people classified as employed is 620,000, what is the unemployment rate?

1. A) 15.6%
2. B) 9.2%
3. C) 7.5%
4. D) 8.1%

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

24) If the number of people employed is 150,000 and the labor force is 160,000, the unemployment rate is:

1. A) 6.25%.
2. B) 10.25%.
3. C) 2.5%.
4. D) 6.67%.

Answer: A

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

25) The unemployment rate is defined as the ratio of the:

1. A) labor force to the total population 16 years old or older.
2. B) number of people unemployed to total population.
3. C) number of people unemployed to the total population 16 years old or older.
4. D) none of the above

Answer: D

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.3

26) Refer to Table 6.3. The number of people not in the labor force equals:

1. A) 5.9.
2. B) 68.4.
3. C) 74.3.
4. D) 201.9.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

27) Refer to Table 6.3. The unemployment rate equals:

1. A) 2.8%.
2. B) 4.2%.
3. C) 4.4%.
4. D) 5.0%.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

28) Suppose an individual works 12 hours per week in a family business and is not looking for other work. Also assume that the individual is not paid for the 12 hours of work. According to the Bureau of Labor Statistics, this individual would be classified as:

1. A) employed.
2. B) not in the labor force.
3. C) a discouraged worker.
4. D) none of the above

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

29) The labor force participation rate is the ratio of the:

1. A) labor force to the total population 16 years old or older.
2. B) labor force to total population.
3. C) number employed to the total population 16 years old or older.
4. D) number employed to total population.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

30) The labor force participation rate equals:

1. A) (labor force) / (population 16 years or older).
2. B) population /(labor force).
3. C) (labor force)/ population.
4. D) employed / population.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

31) In 1999, the U.S. population 16 years old or older was 207.8 million, the number employed was 133.5 million, the number unemployed was 5.9 million, and the labor force was 139.4 million. The labor-force participation rate in 1999 was ________ %.

1. A) 64.2
2. B) 67.1
3. C) 4.2
4. D) 95.8

Answer: B

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

32) In 1999, the U.S. population 16 years old or older was 207.8 million, the number employed was 133.5 million, the number unemployed was 5.9 million, and the labor force was 139.4 million. The unemployment rate in 1999 was ________ %.

1. A) 4.2
2. B) 5.9
3. C) 4.5
4. D) 3.2

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

33) In 2012, the U.S. population 16 years old or older was 242.6 million, the number employed was 142.0 million, the number unemployed was 12.7 million, and the labor force was 154.7 million. The labor-force participation rate in 1999 was ________ %.

1. A) 63.8
2. B) 19.1
3. C) 58.5
4. D) 69.0

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

34) In 2012, the U.S. population 16 years old or older was 242.6 million, the number employed was 142.0 million, the number unemployed was 12.7 million, and the labor force was 154.7 million. The unemployment rate in 1999 was ________ %.

1. A) 8.2
2. B) 8.9
3. C) 5.2
4. D) 9.3

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.4

35) Refer to Table 6.4. The labor-force equals:

1. A) 150.6.
2. B) 120.3.
3. C) 125.
4. D) 83.5.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

36) Refer to Table 6.4. The labor-force participation rate equals:

1. A) 3.1%.
2. B) 66.6%.
3. C) 3.7%.
4. D) 83.5%.

Answer: D

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

37) Refer to Table 6.4. The unemployment rate rate equals:

1. A) 3.1%.
2. B) 66.6%.
3. C) 3.7%.
4. D) 83.5%.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.5

38) Refer to Table 6.5. The labor-force participation rate is:

1. A) 71.43%.
2. B) 81.81%.
3. C) 90.91%.
4. D) 136.36%

Answer: B

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.6

39) Refer to Table 6.6. The labor force:

1. A) equals 10.5 million.
2. B) equals 136.5 million.
3. C) equals 147 million.
4. D) cannot be determined from this information.

Answer: B

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

40) Refer to Table 6.6. The number of people unemployed equals:

1. A) 6.825 million.
2. B) 5 million.
3. C) 10.5 million.
4. D) 8 million.

Answer: A

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

41) If the labor force is 250,000 and the total population 16 years of age or older is 300,000, the labor-force participation rate is:

1. A) 79.5%.
2. B) 83.3%.
3. C) 45.4%.
4. D) 80.9%.

Answer: B

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

42) If the labor-force participation rate is 85% and the total population 16 years of age or older is one million people, the labor force is:

1. A) 280,000 people.
2. B) 80,000 people.
3. C) 850,000 people.
4. D) 180,000 people.

Answer: C

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

43) If the number of unemployed equals 20,000, the number of employed equals 60,000, and the total population 16 years of age and older is 90,000, the labor-force participation rate:

1. A) is 33.33%.
2. B) is 66.2%.
3. C) is 88.9%.
4. D) cannot be determined from this information.

Answer: C

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

44) When an individual quits his/her job and decides to stay at home for a while and not looking for work, the labor-force participation rate:

1. A) decreases.
2. B) increases.
3. C) stays the same.
4. D) may increase or decrease, depending on the length of time he/she stays at home.

Answer: A

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

45) Mike has just graduated from college and is now looking for a job, but has not yet found one. This causes the unemployment rate to ________ and the labor-force participation rate to ________.

1. A) increase; decrease
2. B) stay the same; stay the same
3. C) increase; increase
4. D) increase; stay the same

Answer: C

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

46) The labor-force participation rate of women 20 years or older in has increased in the last 50 years, but has reached a plateau in 1997 of about:

1. A) 60 percent
2. B) 40 percent
3. C) 50 percent
4. D) 70 percent

Answer: A

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Recall Application 1, “Declining Labor Force Participation,” to answer the following questions:

47) Which of the following does the Application identify as a possible explanation for the declining labor force participation rate in the U.S. since 1999?

1. A) Poor job prospects discouraged many people from staying in the labor force.
2. B) Baby boomers are reaching retirement age.
3. C) The generous unemployment benefits provided by the government encouraged workers to stay unemployed.
4. D) Both A and B are correct.

Answer: D

Diff: 1

Topic: Application 1, Declining Labor Force Participation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

48) If the retirement of baby boomers alone was the reason for the declining labor force participation rate in the U.S. since 1999, then an improving economy will:

1. A) not stop the decline labor force participation rate as long as a large number of baby boomers are still in the labor force.
2. B) encourage baby boomers to go back to the work and lower the labor force participation rate.
3. C) encourage baby boomers to go back to the work and raise the labor force participation rate.
4. D) cause the unemployment rate to increase.

Answer: A

Diff: 1

Topic: Application 1, Declining Labor Force Participation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

49) Discouraged workers:

1. A) are part of the labor force.
2. B) are part of structural unemployment.
3. C) are part of frictional unemployment.
4. D) are not considered as part of the labor force.

Answer: D

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

50) Marginally attached workers:

1. A) are not considered as part of the labor force.
2. B) are part of the labor force.
3. C) are considered employed.
4. D) are considered unemployed.

Answer: A

Diff: 1

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

51) Marginally attached workers are workers who leave the labor force because of:

1. A) their inability to find jobs.
2. B) the difficulty of finding transportation.
3. C) difficulty of finding appropriate childcare.
4. D) All of the above are correct.

Answer: D

Diff: 1

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

52) Discouraged workers are workers who leave the labor force because of:

1. A) their inability to find jobs.
2. B) the difficulty of finding transportation.
3. C) difficulty of finding appropriate childcare.
4. D) All of the above are correct.

Answer: A

Diff: 1

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

53) When people who were previously looking for jobs stop looking for jobs, the:

1. A) unemployment rate increases.
2. B) size of the labor force decreases.
3. C) labor-force participation rate does not change.
4. D) unemployment rate does not change.

Answer: B

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

54) When people who were previously looking for jobs stop looking for jobs, they are classified as:

1. A) unemployed.
2. B) in the labor force.
3. C) not in the labor force.
4. D) employed.

Answer: C

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

55) A person who leaves the labor force because they could not find a job is called:

1. A) a discouraged worker.
2. B) a disgruntled worker.
3. C) a dissatisfied worker.
4. D) a disbarred worker.

Answer: A

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

56) Which of the following individuals can be classified as a marginally attached worker?

1. A) Bob, stops looking for a job as a 5th grade teacher after looking for a job the last 6 months.
2. B) Joe, works at McDonald’s after losing his management job at IBM.
3. C) Jane is currently looking for a job, and has not found one.
4. D) Bill, retired from 32 years of government service rather than get a 10 percent pay cut.

Answer: A

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

57) Which of the following individuals can be classified as a marginally attached worker?

1. A) Bob, stops looking for a job as a 5th grade teacher after looking for a job the last 6 months.
2. B) Jane was looking for a job but stopped looking because of her inability to find a babysitter for her 2-year-old son.
3. C) Jane is currently looking for a job and has not found one.
4. D) A and B are correct.

Answer: D

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

58) A discouraged worker is:

1. A) marginally attached.
2. B) not in the labor force.
3. C) not currently looking for a job.
4. D) All of the above are correct.

Answer: D

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

59) Sally works 10 hours a week, but would prefer to work more hours. According to the BLS, Sally is classified as:

1. A) employed and “an individual working part time for economic reason.”
2. B) unemployed and “an individual working part time for economic reason.”
3. C) a discouraged worker.
4. D) employed but not “an individual working part time for economic reasons.”

Answer: A

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

60) Sally works 10 hours a week, but would not prefer to work more hours. According to the BLS, Sally is classified as:

1. A) employed and “an individual working part time for economic reasons.”
2. B) unemployed and “an individual working part time for economic reasons.”
3. C) employed but not “an individual working part time for economic reasons.”
4. D) a discouraged worker.

Answer: C

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

61) An increase in the number of discouraged workers will cause the:

1. A) unemployment rate to decrease and the labor force to decrease.
2. B) unemployment rate to decrease and the labor force to increase.
3. C) unemployment rate to increase and the labor force to decrease.
4. D) unemployment rate to increase and the labor force to increase.

Answer: A

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

62) Which of the following statements about discouraged workers is correct?

1. A) People who are still looking for work and have been unemployed for longer than four weeks are classified as having dropped out of the labor force rather than as being unemployed.
2. B) Because of the existence of discouraged workers, the reported unemployment rate generally understates the true level of unemployment in an economy.
3. C) The unemployment rate rises when those no longer looking for work are no longer counted as unemployed.
4. D) None of the above statements is correct.

Answer: B

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Recall Application 2, “More Disability, Less Unemployment?” to answer the following questions:

63) According to the application, the federal Disability Insurance program provides income to:

1. A) non-elderly workers who are deemed unable to engage in substantial employment.
2. B) elderly workers who are deemed unable to engage in substantial employment.
3. C) non-elderly workers who are deemed able to engage in substantial employment.
4. D) elderly workers who are deemed able to engage in substantial employment.

Answer: A

Diff: 1

Topic: Application 2, More Disability, Less Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

64) According to the application, changes in the federal Disability Insurance program:

1. A) increased the number of non-elderly adults receiving benefits from the program.
2. B) decreased the number of non-elderly adults receiving benefits from the program.
3. C) increased the number of elderly adults receiving benefits from the program.
4. D) decreased the number of elderly adults receiving benefits from the program.

Answer: A

Diff: 1

Topic: Application 2, More Disability, Less Unemployment

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

65) According to the application, the changes in the federal Disability Insurance program:

1. A) made it easier to enter the program.
2. B) made the program’s benefits more generous for low-skilled workers.
3. C) increased the value of healthcare services.
4. D) All of the above characterizes the changes in the program.

Answer: D

Diff: 1

Topic: Application 2, More Disability, Less Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

66) According to the application, the changes in the federal Disability Insurance program:

1. A) encouraged more individuals to claim disability and stay unemployed.
2. B) encouraged more individuals to claim disability and stay employed.
3. C) encouraged more individuals to claim disability and stay out of the labor force.
4. D) encouraged more individuals to look for work.

Answer: C

Diff: 2

Topic: Application 2, More Disability, Less Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

67) According to the application, as more individuals avail of disability benefits:

1. A) the unemployment rate increases because they are not part of the labor force.
2. B) the unemployment rate decreases because they are now considered employed.
3. C) the unemployment rate decreases because they are not part of the labor force.
4. D) the unemployment rate increases because they are now considered unemployed.

Answer: C

Diff: 2

Topic: Application 2, More Disability, Less Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

68) The component of unemployment that is substantially influenced by calendar-related effects are called:

1. A) seasonal unemployment.
2. B) calendar unemployment.
3. C) weather unemployment.
4. D) holiday unemployment.

Answer: A

Diff: 1

Topic: Who are the Unemployed?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

69) Which of the following is an example of seasonal unemployment?

1. A) lost tax preparation jobs after April 15
2. B) lost textiles jobs due to a recession
3. C) lost management jobs after the company Yahoo was bought out by Microsoft
4. D) lost shoe-making jobs after Nike moved operations to China last winter

Answer: A

Diff: 2

Topic: Who are the Unemployed?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

70) Which of the following is not an example of seasonal unemployment?

1. A) lost farming jobs during the winter
2. B) lost textiles jobs due to a recession
3. C) lost retail jobs after the Christmas
4. D) lost accounting jobs after April

Answer: B

Diff: 1

Topic: Who are the Unemployed?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

71) The statistics on unemployment usually shows that men:

1. A) and women have roughly the same unemployment rates.
2. B) have higher unemployment rates than women.
3. C) have lower unemployment rates than women.
4. D) and women have zero unemployment rates.

Answer: B

Diff: 1

Topic: Who are the Unemployed?

Skill: Fact

AACSB: Multicultural and Diversity

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

72) Based on statistics on unemployment, which group of workers experience the highest unemployment rates?

1. A) unmarried men
2. B) White, 16-19 years old
3. C) African American, 16-19 years old
4. D) women maintaining families

Answer: C

Diff: 1

Topic: Who are the Unemployed?

Skill: Fact

AACSB: Multicultural and Diversity

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

73) The unemployment rate is the ratio of the number of people unemployed to the total population 16 years of age or older.

Answer: FALSE

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

74) The ratio of the labor force to the number of people employed is called the labor-force participation rate.

Answer: FALSE

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

75) As the number of discouraged workers increases, we would expect that the unemployment rate would increase.

Answer: FALSE

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

76) If discouraged workers were counted as unemployed, the measured unemployment rate would increase.

Answer: TRUE

Diff: 2

Topic: Alternative Measures of Unemployment and Why They’re Important

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

77) When people who are not working start looking for jobs, the labor-force participation rate increases.

Answer: TRUE

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

78) Among all age groups, workers 16-19 years old have the highest unemployment rate.

Answer: TRUE

Diff: 2

Topic: Who are the Unemployed?

Skill: Fact

AACSB: Multicultural and Diversity

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

79) The unemployment rate is generally the same across demographic groups.

Answer: FALSE

Diff: 1

Topic: How is Unemployment Defined and Measured?

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.7

80) Answer parts (a) through (d) using the information in Table 6.7.

(a) Calculate the number of unemployed workers.

(b) Calculate the number of workers in the labor force.

(c) Calculate the unemployment rate.

(d) Calculate the labor-force participation rate.

(e) Calculate the unemployment rate if 50,000 unemployed workers become “discouraged” and decide to stop looking for work?

Answer:

(a) There are 450,000 unemployed workers.

(b) There are 1,900,000 workers in the labor force.

(c) Unemployment rate = [unemployed/labor force] = [450,000/1,900,000] = 23.7%.

(d) Labor-force participation rate = [labor force/population (16+)] = [1,900,000/2,000,000] = 95%

(e) New unemployment rate = (400,000/1,850,000) = 21.6%. Note that the unemployed and the labor force decreased by the number of discouraged workers.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.8

81) Answer parts (a) through (e) using the information in Table 6.8.

(a) Calculate the number in the labor force.

(b) Calculate the number of unemployed workers.

(c) Calculate the unemployment rate.

(d) The government of the country described in Table 6.8 has determined that the natural rate of unemployment is 6%. How many cyclically unemployed workers are there?

(e) Suppose that the economy described in Table 6.8 moves out of a long recession, job openings increase, and 100,000 discouraged workers become “encouraged” and begin searching for a job. Calculate the new unemployment rate.

Answer:

(a) Labor force = [labor-force participation rate x population (ages 16+)] = 0.75 x 3,000,000 = 2,250,000.

(b) Unemployed = Labor force – Employed = 2,250,000 – 1,500,000 = 750,000.

(c) Unemployment rate = [unemployed/labor force] = [750,000/2,250,000] = 33.3%.

(d) 27.3% of the labor force (614,250 workers) is cyclically unemployed.

(e) Initial unemployment rate = 33.3%. When 100,000 new (unemployed) workers enter the labor force, the new unemployment rate will be [850,000/2,350,000] = 36.2%.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

82) What will happen to the unemployment rate when some unemployed workers quit working and are now classified as “discouraged workers”?

Answer: Once the workers quit looking for a job, these workers are no longer considered as unemployed and are not part of the labor force. As a result, the unemployment rate will decrease.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

83) You are an employee of the Bureau of Labor Statistics involved in the monthly survey of households used to estimate the unemployment rate. In each of the following cases, classify the individual as employed, unemployed, or not in the labor force. Explain your classification.

(a) During the entire week containing the 12th of the month, Rosie the Riveter misses work simply because she didn’t feel like going in to work.

(b) Jenny Wren is a volunteer 20 hours a week on a Rape Crisis telephone hotline. She feels she makes an important contribution to society and would not accept a paying job if one was offered to her.

(c) McCauley Culkin is a hugely successful film star, age 12, who has earned over $5,000,000 each year for the past five years. Currently, McCauley is filming a new movie on location in Tenerife.

(d) Maxwell Edison, a full-time Ph.D. student, is involved in groundbreaking research in fiber optics. His dissertation advisor has already claimed that Maxwell’s work will revolutionize telecommunications.

(e) Maggie Madd, 84, works 10 hours a week doing cleaning services for her son, Norman Neurotic. He pays her minimum wage.

Answer:

(a) Rosie is employed. If Rosie is temporarily absent, with or without pay, she is considered employed.

(b) Jenny is not in the labor force. She is not seeking a job nor does she meet the criteria required to be classified as employed.

(c) McCauley is not in the labor force. He is less than 16 years old.

(d) Maxwell is not in the labor force. He is a full-time student.

(e) Maggie is paid and employed.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

84) During a press conference, the Secretary of Employment notes that the unemployment rate is 7.0%. As a political opponent, how might you criticize this figure as an underestimate? In rebuttal, how might the Secretary argue that the reported rate is an overestimate of unemployment?

Answer: The unemployment rate given by the secretary might be considered an underestimate because discouraged workers, who have given up the job search in frustration, are not counted as unemployed. In addition, full-time workers may have been forced to work part-time. In rebuttal, the secretary might note that a portion of the unemployed have voluntarily left their jobs. Most workers are unemployed only briefly and leave the ranks of the unemployed by gaining better jobs than they had previously held.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

85) For each of the following, indicate if the person would be classified as employed, unemployed, or not in the labor force:

(a) a 70-year-old man who left his job to help his daughter in her business for 10 hours a week,

(b) a 20-year-old college student who is out of school for the summer and is looking for a job,

(c) a 30-year-old woman with a Ph.D. in history who has not been able to find a teaching position and is driving a cab 30 hours a week,

(d) a 40-year-old steel worker who isn’t working and has given up searching for a job,

(e) a 14-year-old movie star starts working on a new episode of Star Trek.

Answer:

(a) not in the labor force

(b) unemployed

(c) employed

(d) not in the labor force

(e) not in the labor force

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Table 6.9

86) Answer parts (a) through (e) using Table 6.9 and the following information. Arboc has a population (ages 16 and older) of 2,000,000. The labor-force participation rate is 90%.

(a) Based on the information, calculate the number of workers in the labor force.

(b) Based on the information, calculate the number of workers unemployed in 1997

(c) Based on the information, calculate the number of workers employed in 1999.

Answer:

(a) Labor force = [labor-force participation rate x population (ages 16+)] = 0.9 x 2,000,000 = 1,800,000.

(b) Unemployed = [unemployment rate x labor force] = 0.42 x 1,800,000 = 75,600.

(c) Employed = [(1-unemployment rate) x labor force] = 0.902 x 1,800,000 = 1,623,600.

Diff: 3

Topic: How is Unemployment Defined and Measured?

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

87) Explain why some economists argue that counting discouraged workers as unemployed gives a better picture of the unemployment situation. How would the magnitude of the unemployment rate change if discouraged workers were counted as unemployed?

Answer: Some argue that discouraged workers should be included because they would take jobs if a job became available. If discouraged workers were included, the unemployment rate would increase.

Diff: 2

Topic: How is Unemployment Defined and Measured?

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Additional Application

NEETS ARE THE NEW DISCOURAGED WORKERS IN JAPAN

Who are the new discouraged workers in Japan?

In Japan, there is growing concern about young people who are not joining the labor force. Young workers who have given up looking for work and often receive support from their parents are known as NEETs—”not in education, employment, or training.” Because Japan has an aging population and does not encourage immigration, it is concerned about labor shortages and has focused attention on the NEETs. Many in Japan are concerned over this phenomenon because it potentially signals a change in the strong Japanese work ethic.

However, the number of individuals in this category is quite small, only 2 percent of Japan’s 33 million young people between the ages of 15 and 34. Nonetheless, the fact that the Japanese decided to name this group suggests that it is socially significant to them. In the United States, individuals not seeking work and supported by their parents would be out of the labor force and possibly marginally attached workers.

SOURCE: Ginny Parker Woods, “In Aging Japan, Young Slackers Stir Up Concerns” Wall Street Journal, December 29,

2005, p. A1.

88) Labor shortages in Japan increased focus on the NEETs. This labor shortage is caused by:

1. A) an aging population.
2. B) a recession.
3. C) a strong work ethic.
4. D) a population boom.

Answer: A

Diff: 1

Topic: Additional Application

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

89) If a person classified as NEET enters the labor market but could not find a job, the labor force:

1. A) increases.
2. B) decreases.
3. C) remains constant.
4. D) becomes zero.

Answer: A

Diff: 1

Topic: Additional Application

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6.2 Categories of Unemployment

1) The portion of unemployment that is due to the mismatch between skills and jobs is called ________ unemployment.

1. A) frictional
2. B) discouraged-worker
3. C) structural
4. D) cyclical

Answer: C

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

2) Changes in the unemployment that occur as the economy expands and contracts are called ________ unemployment.

1. A) the natural rate of
2. B) frictional
3. C) structural
4. D) cyclical

Answer: D

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

3) When an economics professor quits his job from a university and starts looking for a job in another university, he is:

1. A) frictionally unemployed.
2. B) structurally unemployed.
3. C) cyclically unemployed.
4. D) naturally unemployed.

Answer: A

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

4) A man is fired from his job because he was late for work too many times. While he is searching for another job he would be classified as:

1. A) not in the labor force because his employer had a legitimate reason for firing him.
2. B) structurally unemployed.
3. C) cyclically unemployed.
4. D) frictionally unemployed.

Answer: D

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

5) A man is fired from his job because he was late for work too many times. While taking a break from searching for another job he would be classified as:

1. A) not in the labor force.
2. B) frictionally unemployed.
3. C) structurally unemployed.
4. D) cyclically unemployed.

Answer: A

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6) When the economy slows down and real GDP falls, the type of unemployment that will be directly affected is the:

1. A) frictional unemployment.
2. B) structural unemployment.
3. C) cyclical unemployment.
4. D) natural rate of unemployment.

Answer: C

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

7) An auto worker in Ohio who loses her job because the company relocated the plant to another country represents an example of:

1. A) frictional unemployment.
2. B) structural unemployment.
3. C) cyclical unemployment.
4. D) natural unemployment.

Answer: B

Diff: 3

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

8) An individual who cannot find a job because his or her job skills have become obsolete is an example of:

1. A) frictional unemployment.
2. B) structural unemployment.
3. C) cyclical unemployment.
4. D) seasonal unemployment.

Answer: B

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

9) An individual worked for an airline that went out of business because the airline was unable to meet new federal safety standards. While the individual is unemployed, she will be classified as:

1. A) frictionally unemployed.
2. B) naturally unemployed.
3. C) cyclically unemployed.
4. D) structurally unemployed.

Answer: D

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

10) The increase in unemployment that occurs during recessions and depressions is called:

1. A) frictional unemployment.
2. B) structural unemployment.
3. C) cyclical unemployment.
4. D) natural unemployment.

Answer: C

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

11) Cyclical unemployment is the:

1. A) portion of unemployment that is due to mismatches between skills and jobs that result in a significant loss of jobs in certain industries.
2. B) unemployment that occurs during recessions and depressions.
3. C) portion of unemployment that is due to the normal working of the labor market.
4. D) unemployment that results when people become discouraged about their chances of finding a job so they stop looking for work.

Answer: B

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

12) The demand for refrigerators falls when the economy enters a downturn. If a refrigerator manufacturer lays off workers during an economic downturn, this would be an example of:

1. A) frictional unemployment.
2. B) natural unemployment.
3. C) structural unemployment.
4. D) cyclical unemployment.

Answer: D

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

13) The economy is in a recession and the housing market is in a slump. As a result of this, a real estate firm lays off half of its real estate agents. This is an example of:

1. A) frictional unemployment.
2. B) structural unemployment.
3. C) cyclical unemployment.
4. D) natural unemployment.

Answer: C

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

14) The natural rate of unemployment is generally thought of as the:

1. A) ratio of the frictional unemployment rate to the cyclical unemployment rate.
2. B) sum of the structural unemployment and cyclical unemployment rates.
3. C) sum of the frictional unemployment and cyclical unemployment rates.
4. D) sum of the frictional unemployment and structural unemployment rates.

Answer: D

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

15) When the economy’s unemployment rate equals the natural rate, which type of unemployment is assumed to be zero?

1. A) cyclical unemployment
2. B) structural unemployment
3. C) frictional unemployment
4. D) frictional and structural unemployment

Answer: A

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

16) The sum of the frictional and structural unemployment rates is thought of as the:

1. A) natural rate of unemployment.
2. B) normal rate of unemployment.
3. C) cyclical rate of unemployment.
4. D) seasonal rate of unemployment.

Answer: A

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

17) Economists in the United States today estimate the natural unemployment rate to be:

1. A) between 5 percent and 6.5 percent.
2. B) between 6 percent and 8 percent.
3. C) between 3 percent and 5 percent.
4. D) between 0 percent and 1 percent.

Answer: A

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

18) Based on economists’ estimate of the natural unemployment rate today, the U.S. economy (8 percent unemployment in 2012) is:

1. A) less than 3 percentage points above the natural rate of unemployment.
2. B) more than 3 percentage points above the natural rate of unemployment.
3. C) exactly at the natural rate of unemployment.
4. D) more than 1 percentage point below the natural rate of unemployment.

Answer: A

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

19) The economy attains full employment when the unemployment rate:

1. A) equals the natural rate of unemployment.
2. B) equals the structural rate of unemployment.
3. C) is equal to zero.
4. D) equals to seven percent or higher.

Answer: A

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

20) During the early 1990s, companies started downsizing. One of the results of this downsizing was the permanent reduction in the number of middle management positions. This change in the way businesses operate would have:

1. A) increased the natural rate of unemployment.
2. B) decreased the natural rate of unemployment.
3. C) not affected the natural rate of unemployment.
4. D) either increased or decreased the natural rate of unemployment.

Answer: A

Diff: 2

Topic: The Natural Rate of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

21) An increase in search costs will decrease structural unemployment.

Answer: FALSE

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

22) The unemployment that occurs as a result of the normal functioning of the labor market is called cyclical unemployment.

Answer: FALSE

Diff: 1

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

23) The natural rate of unemployment is the unemployment rate during a period of full employment.

Answer: TRUE

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

24) If there were no frictional unemployment the economy would grow faster.

Answer: FALSE

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

25) The natural rate of unemployment changes over time.

Answer: TRUE

Diff: 2

Topic: The Natural Rate of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

26) The level of the natural rate of unemployment in the economy is determined by Congress and the President.

Answer: FALSE

Diff: 1

Topic: The Natural Rate of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

27) You are an employee of the Bureau of Labor Statistics involved in the monthly survey of households used to estimate the unemployment rate. In each of the following cases, classify the individual as frictionally, structurally, or cyclically unemployed. Explain your classification.

(a) There has been a general economic slowdown. Because of weak demand, Andy Capp has lost his job at the docks.

(b) Phil McCafferty, a newly qualified dental school graduate, is looking for a place to set up practice.

(c) Coal miner Ned Ludd is thrown out of work by the introduction of a more mechanized production process.

(d) Latosha Hogan, a computer programmer with a large bank, quit her job two months ago in search of a better-paid programming position. She is still looking.

Answer:

(a) Andy is cyclically unemployed. He has lost his job as a result of the general economic recession.

(b) Phil is frictionally unemployed. Job openings exist for him. It is merely a case of tracking down a position.

(c) Ned is structurally unemployed. Unemployment due to technological change in an industry is classified as structural.

(d) Latosha is frictionally unemployed. Job openings exist for her.

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

28) Explain the three different types of unemployment. Give an example of each type.

Answer: The three different types of unemployment are frictional, structural, and cyclical. Frictional unemployment results from the normal workings of the labor market. An example of frictional unemployment is an individual looking for his or her first job after graduating from college. Structural unemployment is due to changes in the way we produce goods and services in the economy. An example of structural unemployment is a steel worker in Pittsburgh that lost his job because the steel plant he worked at shut down and moved to Mexico. Cyclical unemployment is the unemployment that occurs during recessions and depressions. An example of cyclical unemployment is a construction worker who loses his job because the demand for new office buildings has fallen during a recession.

Diff: 2

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

29) Is seasonal unemployment one of the basic types of unemployment? Explain why or why not.

Answer: Seasonal unemployment is not one of the basic types of unemployment because the unemployment data is first seasonality adjusted. This means that the seasonal component in the unemployment is removed from the data. The remaining unemployment are classified into three basic types: frictional, structural and cyclical.

Diff: 3

Topic: Types of Unemployment: Cyclical, Frictional, and Structural

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

30) Suppose that the economy is experiencing a 3 percent unemployment rate when the natural rate of unemployment is 5 percent. Is this unemployment rate sustainable in the long run? Explain.

Answer: No. At unemployment rates lower than the natural rate, firms will be more aggressive in hiring workers, resulting in increasing wages and eventually, higher prices. Higher prices will decrease the quantity of those goods demanded in the economy, forcing the firms to decrease production. This will eventually lead to an increase in the unemployment rate.

Diff: 2

Topic: The Natural Rate of Unemployment

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6.3 The Costs of Unemployment

1) Payments received from the government upon becoming unemployed is called:

1. A) unemployment insurance.
2. B) social security.
3. C) welfare.
4. D) unemployment salary.

Answer: A

Diff: 1

Topic: The Costs of Unemployment

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

2) Which of the following is considered a cost of unemployment?

1. A) higher crime, suicide and divorce rates
2. B) severe psychological costs to the job loser
3. C) wasted resources because a worker is not being utilized
4. D) All of the above are considered costs of unemployment.

Answer: D

Diff: 2

Topic: The Costs of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

3) While one benefit of unemployment insurance is that it can temporarily offset some of the financial costs of losing a job, its downside is that it:

1. A) increases the length of time a worker remains unemployed.
2. B) increases the incentive for a worker to find a job immediately.
3. C) decreases the length of time a worker remains unemployed.
4. D) increases the incentive for the worker to have a second job.

Answer: A

Diff: 2

Topic: The Costs of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

4) Unemployment insurance:

1. A) is a temporary cushion to the economic hardships caused by unemployment.
2. B) is a permanent substitute for income lost as a result of unemployment.
3. C) is usually higher than the income that the unemployed worker lost.
4. D) is available only to workers above the age of 55.

Answer: A

Diff: 1

Topic: The Costs of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

Recall Application 3, “Social Norms, Unemployment, and Perceived Happiness,” to answer the following questions:

5) According to the application, people’s well-being declined when:

1. A) they become unemployed.
2. B) others around them become unemployed.
3. C) their wages decrease.
4. D) both A and B are correct.

Answer: D

Diff: 2

Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6) According to the application, men suffered ________ in well-being when ________ were also unemployed.

1. A) a smaller decline; their peers
2. B) a larger decline; their peers
3. C) a smaller increase; their family
4. D) a larger decline; their family

Answer: A

Diff: 2

Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

7) According to the application, Andrew Clark found that the more ________ an individual was, the ________ aggressive he or she was in looking for a job.

1. A) content; more
2. B) unhappy; more
3. C) lazy; less
4. D) in debt; less

Answer: B

Diff: 2

Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

8) The costs of unemployment are limited to only financial costs.

Answer: FALSE

Diff: 1

Topic: The Costs of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

9) A disadvantage of prolonged unemployment is that it causes a worker to lose some of his skills.

Answer: TRUE

Diff: 1

Topic: The Costs of Unemployment

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

10) Unemployment insurance benefits are typically temporary and completely reimburses the worker’s lost earnings.

Answer: FALSE

Diff: 1

Topic: The Costs of Unemployment

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Identify different types and measures of unemployment and discuss its causes.

6.4 The Consumer Price Index and the Cost of Living

1) A price index is:

1. A) a measurement showing how the average price of a bundle of goods changes over time.
2. B) a measurement showing the cost of a bundle of goods at a point in time.
3. C) a sustained increase in the overall price level.
4. D) a decrease in the overall price level.

Answer: A

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

Table 6.10

2) Refer to Table 6.10. Suppose 1999 is the base year. The price index in 1999 is:

1. A) 1,000.
2. B) 100.
3. C) 1.
4. D) 10.

Answer: B

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

3) Refer to Table 6.10. If 1999 is the base year, the price index in 1998 is:

1. A) 84.5.
2. B) 96.7.
3. C) 113.8.
4. D) 103.9.

Answer: A

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

4) Refer to Table 6.10. If 1999 is the base year, the price index in 2000 is:

1. A) 102.4.
2. B) 100.9.
3. C) 89.2.
4. D) 101.4.

Answer: D

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

5) Refer to Table 6.10. If 1999 is the base year, the price index in 2001 is:

1. A) 109.8.
2. B) 112.7.
3. C) 120.5.
4. D) 115.2.

Answer: B

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

6) Refer to Table 6.10. If 1999 is the base year, then the inflation rate (i.e., the growth rate of the price index) between 2000 and 2001 is:

1. A) about 11 percent.
2. B) about 13 percent.
3. C) about 9 percent.
4. D) about 7 percent.

Answer: A

Diff: 3

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

Table 6.11

7) Refer to Table 6.11. If 1999 is the base year, the price index in 1999 is:

1. A) 100.
2. B) 121.7.
3. C) 138.7.
4. D) 1998.

Answer: A

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

8) Refer to Table 6.11. If 1999 is the base year, the price index in 2000 is:

1. A) 100.
2. B) 121.7.
3. C) 138.7
4. D) 1998.

Answer: B

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

9) Refer to Table 6.11. If 1999 is the base year, the price index in 2001 is:

1. A) 100.
2. B) 121.7.
3. C) 138.7.
4. D) 1998.

Answer: C

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

10) Refer to Table 6.11. If 1999 is the base year, then the inflation rate (i.e., the growth rate of the price index) between 1999 and 2000 is:

1. A) zero percent.
2. B) 121.7 percent.
3. C) 2.17 percent.
4. D) 17.8 percent.

Answer: A

Diff: 3

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

11) Refer to Table 6.11. If 1999 is the base year, then the inflation (i.e., the growth rate of the price index) between 2000 and 2001 is:

1. A) about 14 percent.
2. B) about 17 percent.
3. C) about 21 percent.
4. D) about 38 percent.

Answer: A

Diff: 3

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

12) The cost of the basket of goods in Year 1 is $200 and the cost of the basket of goods in Year 2 is $225. If Year 1 is used as the base year, the Year 2 price index is:

1. A) 80.
2. B) 112.5.
3. C) 66.67.
4. D) 150.

Answer: B

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

13) Suppose that 1999 is the base year and the price index for 2008 is 130. A basket of goods that is valued $200 in 1999 would cost ________ in 2008.

1. A) $260
2. B) $230
3. C) $30
4. D) $60

Answer: A

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

14) Suppose that 1999 is the base year and the price index for 2008 is 130. A basket of goods that is valued $450 in 2008 would cost ________ in 1999.

1. A) $346
2. B) $585
3. C) $320
4. D) $4203

Answer: A

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

15) The cost of the basket of goods in 2009 is $550 and the cost of the basket of goods in 2010 is $700. If 2009 is used as the base year, the price index for 2010 is:

1. A) 127.2.
2. B) 155.
3. C) 78.5.
4. D) 100.

Answer: A

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

16) The index used most often to measure prices paid by households is the:

1. A) producer price index.
2. B) consumer price index.
3. C) wholesale price index.
4. D) GDP deflator.

Answer: B

Diff: 1

Topic: The CPI vs. the Chain Index for GDP

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

17) Which of the following statements is false?

1. A) One problem with any fixed-bundle index as a measure of the cost of living is that it does not account for substitutions that consumers might make in response to price changes.
2. B) The chain index for GDP overstates actual changes in prices.
3. C) The best overall indicator of inflationary pressures in the economy is the GDP price index.
4. D) The consumer price index understates changes in the cost of living.

Answer: D

Diff: 3

Topic: The CPI vs. the Chain Index for GDP

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

18) What is the difference between the CPI and the GDP chain index?

1. A) The CPI includes a fixed basket of goods while the chain index does not.
2. B) The CPI includes capital goods but the chain index does not.
3. C) The CPI basket includes more goods and services than the GDP chain index basket.
4. D) The CPI measures price changes while the GDP chain index measures production changes.

Answer: A

Diff: 3

Topic: The CPI vs. the Chain Index for GDP

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

19) What is the difference between the CPI and the GDP chain index?

1. A) The CPI basket includes imported goods while the GDP chain index does not.
2. B) The CPI does not include capital goods but the chain index does.
3. C) The CPI basket includes fewer goods and services than the GDP chain index basket.
4. D) All of the above are correct.

Answer: D

Diff: 2

Topic: The CPI vs. the Chain Index for GDP

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

20) Both the CPI and the chain index for GDP overstate actual changes in cost of living due to:

1. A) the difficulty of keeping track of changing consumer preferences.
2. B) the income effect.
3. C) the difficulty of keeping track of the price of imports.
4. D) the difficulty of measuring quality improvements.

Answer: D

Diff: 1

Topic: The CPI vs. the Chain Index for GDP

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

21) Many economists believe that each year inflation is overestimated by between:

1. A) 2.5% and 3.5%.
2. B) 0.1% and 0.5%.
3. C) 0.5% and 1.5%.
4. D) 1.5% and 2.5%.

Answer: C

Diff: 1

Topic: Problems in Measuring Changes in Prices

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

22) Which of the following statements about price indexes and the cost of living is correct?

1. A) As long as the overstatement of actual price increases remains below the unemployment rate this measurement bias is mostly irrelevant.
2. B) Because the overstatement of actual price increases is always smaller than the growth rate of real GDP this measurement bias is mostly irrelevant.
3. C) A one percent overstatement of actual price increases has a multi-billion impact in Social Security budgets.
4. D) If the overstatement of actual price increases continues, the Social Security system is likely to go bankrupt within the next five years.

Answer: C

Diff: 2

Topic: Problems in Measuring Changes in Prices

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

23) COLA is an acronym that stands for:

1. A) Cost of Living Adjustment.
2. B) Cost of Living Annually.
3. C) Cost of Living Alone.
4. D) Cost of Living Account.

Answer: A

Diff: 1

Topic: Problems in Measuring Changes in Prices

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

Recall Application 4, “The Introduction of Cell Phones and the Bias in the CPI,” to answer the following questions:

24) According to the application, the failure to include cell phones in the calculation of the CPI creates an upward bias on the telecommunications component of the CPI by 0.8 to 1.9 percent. The reason for this upward bias is most likely from:

1. A) the decrease in the price of cell phones.
2. B) the increase in the price of cell phones.
3. C) the increase in the price of cell phone calls.
4. D) B and C are correct.

Answer: A

Diff: 2

Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

25) According to the application, the failure to include cell phones in the calculation of the CPI creates an upward bias on the telecommunications component of the CPI by 0.8 to 1.9 percent. If the measured inflation for telecommunications was 5%, then the actual inflation was somewhere between:

1. A) 3.1 to 4.2 percent.
2. B) 0.8 to 1.9 percent.
3. C) 5.8 to 6.9 percent.
4. D) 5.9 to 6.8 percent

Answer: A

Diff: 2

Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

26) According to the application, the failure to include cell phones in the calculation of the CPI creates an upward bias on the telecommunications component of the CPI by 0.8 to 1.9 percent. If the measured inflation for telecommunications was 3%, then the actual inflation was somewhere between:

1. A) 1.1 to 2.2 percent.
2. B) 0.8 to 1.9 percent.
3. C) 3.8 to 4.9 percent.
4. D) 3.9 to 4.8 percent

Answer: A

Diff: 2

Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

27) Why were cell phones not included in the CPI basket immediately after it was introduced?

1. A) Most American families did not have cell phones when they were first introduced.
2. B) The cell phones were all made in Japan, so they were not included in GDP.
3. C) Only one kind of phone can be included in the CPI basket, and in 1983, they were the landline phones.
4. D) All of the above are correct.

Answer: A

Diff: 2

Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

28) The CPI somewhat overstates changes in the cost of living because it does not allow for substitutions that consumers might make in response to relative price changes.

Answer: TRUE

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

29) The CPI somewhat overstates changes in the cost of living while the GDP chain index does not.

Answer: FALSE

Diff: 2

Topic: The CPI vs. the Chain Index for GDP

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

30) A 100% increase in the price of salt changes the CPI more than a 10% increase in rent.

Answer: FALSE

Diff: 2

Topic: The Consumer Price Index and the Cost of Living

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

31) Changes in the CPI provide an accurate measure of changes in the cost of living for all individuals.

Answer: FALSE

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

32) Both the CPI and the chain index for GDP understate actual changes in prices.

Answer: FALSE

Diff: 2

Topic: The CPI vs. the Chain Index for GDP

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

33) Overstating the actual change in prices has a large impact on Social Security spending.

Answer: TRUE

Diff: 2

Topic: Problems in Measuring Changes in Prices

Skill: Fact

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

34) What is the Consumer Price Index?

Answer: The Consumer Price Index is a price index that measures the cost of a fixed basket of goods chosen to represent the consumption pattern of individuals.

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Definition

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

35) Suppose that Linda wants to calculate a price index for the goods that she commonly purchases each week. The cost of her bundle of goods and services was $350 in 2008, $445 in 1999, and $470 in 2010. If Linda uses 2008 as the base year, what will be the value of her price index for 2008, 2009, and 2010?

Answer: For 2008, the price index will be [$350/$350 x 100] = 100. For 2009, the price index will be For 2010, the price index will be

Diff: 1

Topic: The Consumer Price Index and the Cost of Living

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

36) What are some of the problems associated with using the Consumer Price Index as a measure of changes in the cost of living?

Answer: Many economists believe that the CPI overstates actual changes in prices. There is a problem with measuring quality improvements over time. Also, the CPI uses a fixed market basket, which means that it does not allow for the possibility that consumers will alter their purchases when relative prices change.

Diff: 1

Topic: Problems in Measuring Changes in Prices

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

37) How does the Consumer Price Index differ from the GDP chain index?

Answer: The CPI includes goods that are typically purchased by consumers. This includes imported goods (which are excluded from the GDP chain index) but excludes goods that would be typically purchased by firms or by the government (which are included in the GDP chain index). Also, the CPI is calculated using a fixed basket of goods and services, while the GDP chain index is not.

Diff: 2

Topic: The CPI vs. the Chain Index for GDP

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

6.5 Inflation

Table 6.12

1) Refer to Table 6.12. If 1998 is the base year, the inflation rate between 1999 and 2000 is:

1. A) 1.40%.
2. B) 1.01%.
3. C) 0.5%.
4. D) none of the above

Answer: A

Diff: 3

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

2) Refer to Table 6.12. If 1998 is the base year, the inflation rate between 1998 and 1999 is ________ %, and the inflation rate between 1998 and 2000 is ________ %.

1. A) 18.3; 20
2. B) 20.5; 10.5
3. C) 12.7; 5.9
4. D) 24.1; 8.4

Answer: A

Diff: 3

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

3) Refer to Table 6.12. If 1998 is the base year, the highest inflation rate is between the years:

1. A) 2000 and 2001.
2. B) 1999 and 2000.
3. C) 1998 and 1999.
4. D) cannot be determined from the given information

Answer: C

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

Table 6.13

4) Refer to Table 6.13. If 1999 is the base year, the inflation rate between 1999 and 2000 is:

1. A) 0.0%.
2. B) 21.7%.
3. C) 30.7%.
4. D) 3.78%.

Answer: A

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

5) Refer to Table 6.13. If 1999 is the base year, the inflation rate between 1999 and 2001 is:

1. A) 1.4%.
2. B) 114%.
3. C) 14%.
4. D) 9%.

Answer: C

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

6) Refer to Table 6.13. If 2000 is the base year, the inflation rate between 1999 and 2001 is:

1. A) 1.4%.
2. B) 114%.
3. C) 14%.
4. D) 9%.

Answer: C

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

7) If the price index in Year 1 is 115 and the price index in Year 2 is 120, the rate of inflation between Year 1 and Year 2 is:

1. A) 10.7%.
2. B) 1.2%.
3. C) 15%.
4. D) 4.3%.

Answer: D

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

8) If 1999 is the base year and the inflation rate between 1999 and 2000 is 7%, the price index in 2000 must be equal to:

1. A) 70.
2. B) 107.
3. C) 170.
4. D) cannot be determined from this information because the index in the base year is not given

Answer: B

Diff: 3

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

9) If 1999 is the base year and the inflation rate between 1999 and 2000 is -12%, the price index in 2000 must be equal to:

1. A) 120.
2. B) -120.
3. C) 88.
4. D) cannot be determined from this information because the base year is not known

Answer: C

Diff: 3

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

10) If the price index in 2000 is 120 and the price index in 2001 is 112, then the rate of inflation between 2000 and 2001 is:

1. A) -8.7%.
2. B) -8.6%.
3. C) -4.17%.
4. D) -6.6%.

Answer: D

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

11) If the price index in 2000 is 120 and the price index in 2001 is 112, then the economy experiences ________ between 2000 and 2001.

1. A) inflation
2. B) hyperinflation
3. C) disinflation
4. D) deflation

Answer: D

Diff: 2

Topic: Inflation

Skill: Conceptual

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

12) Suppose that the CPI in 1999 was 125.2 and the CPI in 2000 was 139.1. The rate of inflation between 1999 and 2000 was:

1. A) 11.1%.
2. B) 12.9%.
3. C) 13.9%.
4. D) 14.3%.

Answer: A

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

13) Suppose that the CPI in 2000 was 102 and the CPI in 2001 was 104. The rate of inflation between 2000 and 2001 was:

1. A) 2.24%.
2. B) 2.42%.
3. C) 4.22%.
4. D) 1.96%.

Answer: D

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

14) Suppose that the CPI in Year 1 is 150 and the CPI in Year 2 is 200. The rate of inflation between Year 1 and Year 2 is:

1. A) 14.28%.
2. B) 25%.
3. C) 33.33%.
4. D) 50%.

Answer: C

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

15) Suppose that the CPI in Year 1 is 250 and the CPI in Year 2 is 100. The rate of inflation between Year 1 and Year 2 is:

1. A) 14.28%.
2. B) -150%.
3. C) 40%.
4. D) -60%.

Answer: D

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

16) Deflation is a great economic problem because:

1. A) consumers can not afford to maintain their usual lifestyles.
2. B) firms have a difficult time selling their goods and services.
3. C) people have difficulty paying back their debts.
4. D) Social Security costs rise very fast.

Answer: C

Diff: 1

Topic: The Perils of Deflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

17) Deflation is a great economic problem because:

1. A) prices and wages fall but interest rates remain the same.
2. B) prices and wages fall but debts remain the same.
3. C) prices fall more slowly than wages.
4. D) lower prices and wages promote unemployment.

Answer: B

Diff: 1

Topic: The Perils of Deflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

18) If the U.S. economy experienced a large deflation, what would most likely happen to U.S. banks?

1. A) U.S. bank profits would decline as more borrowers default.
2. B) U.S. banks would experience large profits.
3. C) U.S. banks would not be affected by the deflation.
4. D) U.S. banks will find themselves making more loans.

Answer: A

Diff: 1

Topic: The Perils of Deflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

19) As a result of the deflation experienced by Japan in the 1990s:

1. A) many borrowers including large corporations defaulted on their debts.
2. B) the Japanese government defaulted on their debts.
3. C) banks made lots of profits from their loans.
4. D) the U.S. government borrowed more from the Chinese government.

Answer: A

Diff: 1

Topic: The Perils of Deflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

20) Suppose that the inflation rate measured by changes in the Consumer Price Index is 5%. Does this mean that every individual’s cost of living has increased by 5%? Explain.

Answer: No. Everyone will not experience a 5% increase in the cost of living. It depends on the combination of goods and services consumers buy. If consumers spend a high percentage of their income on goods and services that have increased in price, then their cost of living may have risen by 5% or more. If consumers are able to substitute toward less-expensive goods or if they don’t purchase goods whose prices increased, then their cost of living would increase by less than 5%.

Diff: 2

Topic: Inflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

21) If Year 1 is the base year, the price index for Year 2 is 105, and the price index for Year 3 is 103. What is the inflation rate in Years 2 and 3? Explain what has happened to the cost of living between Years 1 and 2 and Years 2 and 3.

Answer: The inflation rate in year 2 is 5%. The inflation rate in year 3 is -1.9%. The cost of living increased between years 1 and 2, but decreased between years 2 and 3.

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

Table 6.14

22) Based on the information in Table 6.14, calculate the inflation rate for 2004, 2005, 2006, and 2007.

Answer: For 2004, the inflation rate = [(105.00-100.00)/105.00] = -4.8%%.

For 2005, the inflation rate = [(110.00-100.00)/100.00] = 10%.

For 2006, the inflation rate = [(115.50-110.00)/110.00] = 5%.

For 2007, the inflation rate = [(117.81-115.50)/115.50] = 2%.

Diff: 2

Topic: Inflation

Skill: Analytical

AACSB: Analytic Skills

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.

23) Explain why a large deflation could force many borrowers to default on their loans.

Answer: When the economy experiences a large decrease in the price level, incomes usually go down with it. Unfortunately, the nominal value of debt stays the same. With lower wages, it becomes more difficult for individuals to pay back the debt. As a result, more borrowers default on their debts.

Diff: 2

Topic: The Perils of Deflation

Skill: Conceptual

AACSB: Reflective Thinking

Learning Outcome: Discuss the key measures, theories, and effects of inflation and deflation.