ECON MACRO 5th Edition McEachern

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Chapter 07 Unemployment and Inflation

TRUEFALSE

1. A major cost of unemployment is lost production.

(A) True

(B) False

Answer : (A)

2. The unemployment rate rises any time there is an increase in the number of unemployed persons.

(A) True

(B) False

Answer : (B)

3. The labor force consists of all adults who are currently employed.

(A) True

(B) False

Answer : (B)

4. Inmates from the county prison who are on work release are counted as part of the labor force.

(A) True

(B) False

Answer : (B)
5. Discouraged workers are included in labor force figures, but not in unemployment figures.

(A) True

(B) False

Answer : (B)

6. The unemployment rate among African American workers in the United States is higher than that
among white workers.

(A) True
(B) False

Answer : (A)

7. Construction workers at times face high rates of unemployment because their work is both
seasonal and subject to wide swings over the business cycle.

(A) True (B)

False

Answer : (A)

8. Ginger quits her job as personal secretary to the Vice President of HR Technologies because she
cannot handle the stress. It takes her three weeks to find a job as a receptionist at Mariam Hotels
and Resorts. Over these three weeks, she would be considered frictionally unemployed.

(A) True (B)

False

Answer : (A)

9. A person whose skills do not match available job openings is considered frictionally unemployed.

(A) True

(B) False

Answer : (B)

10. Most of the unemployment during the Great Depression was cyclical unemployment.

(A) True

(B) False

Answer : (A)

11. Government fiscal policies that attempt to stimulate aggregate demand are often aimed at
reducing cyclical unemployment.

(A) True (B)

False

Answer : (A)
12. If someone with a Ph.D. in philosophy finds work as a taxi driver, but continues to look for a
college teaching position, he is counted as being employed.

(A) True (B)

False

Answer : (A)

13. Inflation is defined as a sustained increase in an economy's price level.

(A) True

(B) False

Answer : (A)

14. A sustained decrease in an economy's price level is known as deflation.

(A) True

(B) False

Answer : (A)

15. If the price level increases by 2 percent each year, the inflation rate is increasing.

(A) True

(B) False

Answer : (A)

16. During periods of high inflation, people want to hold as much money as possible.

(A) True

(B) False

Answer : (B)

17. Hyperinflation refers to a period of extremely erratic inflation rates.

(A) True

(B) False

Answer : (B)
18. The view that union wage demands may be a source of inflation would be best associated with
cost-push inflation.

(A) True (B)

False

Answer : (A)

19. Demand-pull inflation is worse than cost-push inflation because, in addition to higher prices,
demand-pull inflation also reduces employment.

(A) True (B)

False

Answer : (B)

20. Inflation can only be caused by an increase in aggregate demand.

(A) True

(B) False

Answer : (B)

21. Anticipated inflation causes more problems in the economy than unanticipated inflation.

(A) True

(B) False

Answer : (B)

22. The nominal interest rate is equal to the real interest rate minus the anticipated inflation rate.

(A) True

(B) False

Answer : (B)

23. Unanticipated inflation generally hurts borrowers and benefits lenders.

(A) True

(B) False

Answer : (B)
24. Inflation is the hardest on those living on fixed incomes.

(A) True

(B) False

Answer : (A)

25. Relative prices describe the terms at which individual goods are exchanged for one another.

(A) True

(B) False

Answer : (A)

26. During periods of inflation, all prices increase.

(A) True

(B) False

Answer : (A)

27. An increase in the interest rate will increase the demand for loanable funds.

(A) True

(B) False

Answer : (B)

28. An increase in the demand for loanable funds, other things constant, will increase the interest
rate.

(A) True (B)

False

Answer : (A)

29. An increase in the supply of loanable funds, other things constant, will increase the interest rate.

(A) True

(B) False

Answer : (B)
30. The nominal interest rate is determined in the market for loanable funds.

(A) True

(B) False

Answer : (A)

31. The real interest rate can be negative.

(A) True

(B) False

Answer : (A)

32. During periods of inflation, the real value of a given amount of nominal dollars decreases.

(A) True

(B) False

Answer : (A)

MULTICHOICE

33. Which of the following is not a cost of unemployment?

(A) A loss of income

(B) Emotional or psychological problems

(C) Loss of job skills

(D) A decrease in production

(E) Higher annual inflation rates

Answer : (E)

34. The labor force in an economy consists of all:

(A) the people in the economy who are not retired.

(B) the people in the economy over 16 years of age.

(C) the adults in the economy between 18 and 65 years old who are able to work.

(D) the civilian noninstitutional adult population that is either working or looking for work.
(E) the noninstitutional adult population who are graduates of high school.

Answer : (D)

35. Consider an economy made up of 100 people sixteen years of age and older, 60 of whom hold
jobs, 10 of whom are looking for work, and 15 of whom are retired. The number of people in the
labor force is .

(A) 30

(B) 60

(C) 85

(D) 90

(E) 70

Answer : (E)

36. Which of the following people would be counted in the labor force?

(A) Chou, who lost his job and last looked for work three months ago

(B) Stephanie, who holds a Ph.D. in history but can only find part-time employment at a fast food
restaurant

(C) Jordan, who would like to work as a stockbroker but is a stay-at-home father

(D) Steffan, who is a patient in a mental hospital

(E) Monique, age 90, who is enjoying her retirement in Montana

Answer : (B)

37. People who are not currently employed but say they want a job are counted as unemployed only
if they:

(A) have previously held a job.

(B) are actively seeking employment.

(C) are discouraged workers.

(D) are between 16 and 65 years of age.

(E) are willing to accept any offer of employment.

Answer : (B)
38. The unemployment rate measures the:

(A) number of people in the labor force divided by the adult population.

(B) percentage of people in the labor force who are unemployed.

(C) percentage of people in an economy who have dropped out of the labor force.

(D) number of people in the adult population who are looking for work.

(E) number of people in the labor force who are not working.

Answer : (B)

39. Consider an economy made up of 100 people, 60 of whom hold jobs, 10 of whom are looking for
work, and 15 of whom are retired. The number of unemployed persons is .

(A) 10

(B) 15

(C) 40

(D) 30

(E) 90

Answer : (A)

40. The unemployment rate will increase whenever there is a(n):

(A) increase in the number of unemployed persons.

(B) increase in the number of unemployed persons relative to the size of the labor force.

(C) increase in the size of the U.S. population but no change in the number of unemployed persons.

(D) increase in the size of the labor force.

(E) increase in the size of the U.S. population and a decrease in the number of unemployed persons.

Answer : (B)

41. In an economy, U = the number of adults who are unemployed, E = the number of adults who
are employed, and NLF = the number of adults not in the labor force. The unemployment rate of the
economy is equal to:

(A) U/(E + NLF).

(B) U/E.

(C) U/(U + E).

(D) U/(E + NLF).

(E) U/(U + E − NLF).

Answer : (C)

42. Which of the following people would be counted as employed?

(A) A retired naval officer

(B) A high school student

(C) A stay-at-home father

(D) A teenager who has given up looking for work after a year of trying

(E) A ski instructor who is working during the summer

Answer : (E)

43. If top government officials claim that more people are working now than ever before, then which
of the following is true?

(A) The unemployment rate is lower now than ever before.

(B) The number of people unemployed is lower now than ever before.

(C) The employment rate is higher now than ever before.

(D) The number of people in the labor force is higher now than ever before.

(E) The number of people employed is higher now than ever before.

Answer : (E)

44. A discouraged worker is one who:

(A) is underqualified for his current job.

(B) dislikes his current job but is afraid to quit.

(C) drops out of the labor force because he cannot find a job.

(D) quits his job because the possibility of advancement was very low.

(E) is overqualified for his current job.

Answer : (C)

45. "Discouraged workers" comprise the percentage of those in the:

(A) labor force who are employed and are seeking employment.

(B) labor force who have chosen early retirement because they dislike their work.

(C) adult population who want to be employed but have given up the search for a job.

(D) labor force who are looking for a job but cannot find one.

(E) adult population who are in the labor force.

Answer : (C)

46. Anne is an accountant who lost her job in the last recession and has given up looking for work
after an unsuccessful job search. Which of the following is true in this case?

(A) She is a discouraged worker.

(B) She is underemployed.

(C) This is an example of cyclical unemployment.

(D) This is an example of seasonal unemployment.

(E) She is overemployed.

Answer : (A)

47. Suppose the total population of an economy is 150 million, the labor force is 100 million, and the
unemployment is 94 million. The unemployment rate is .

(A) 6 percent

(B) 80 percent

(C) 94 percent

(D) 10 percent

(E) 15 percent

Answer : (C)

48. Who among the following would not be considered officially unemployed?

(A) Jones, who quit his job to look for a better job in another part of the country

(B) Jason, who got fired from his job when the government cut spending

(C) Bourne, who is looking for a job after being out of the labor force for five years

(D) Sophie, who retired early because she disliked her current job
(E) Annie, who dropped out of the labor force after a year of job search

Answer : (D)

49. Which of the following people would be counted among the unemployed?

(A) A new college graduate selling newspaper advertisements part time while looking for other work

(B) A new college graduate selling newspaper advertisements full time while looking for other work

(C) A new college graduate selling newspaper advertisements part time and not looking for other
work

(D) A new college graduate who gets tired of selling newspaper advertisements and takes off on a
motorcycle trip to Alaska

(E) A new college graduate not qualified for any of the jobs available in his small town

Answer : (E)

50. Which of the following people would be classified as unemployed?

(A) A person who wants a job as a fashion model but cannot find work in that field

(B) Someone who quits a part-time job to attend school full time

(C) Someone who does not have a job and gives up looking for one

(D) A person who works at a job that underutilizes his or her skills

(E) A person who works part-time and would rather work full time

Answer : (A)

51. The unemployment rate will decrease whenever there is a(n) .

(A) increase in the number of persons classified as unemployed

(B) decrease in the number of unemployed persons relative to the size of the labor force

(C) decrease in the size of the population and no change in the number of persons classified as
employed

(D) reduction in the size of the labor force

(E) decrease in the number of unemployed persons and no change the population

Answer : (B)

52. A recent college graduate who is looking for her first job would be considered .
(A) a discouraged worker

(B) underemployed

(C) overemployed

(D) unemployed

(E) not in the labor force

Answer : (D)

53. Consider an economy with an adult population of 100, 50 of whom hold jobs, 10 of whom are
looking for work, and 15 of whom are retired. The labor force participation rate is .

(A) 100 percent

(B) 60 percent

(C) 50 percent

(D) 40 percent

(E) 10 percent

Answer : (B)

54. In an economy, U = the number of adults who are unemployed, E = the number of adults who
are employed, and NLF = the number of adults not in the labor force. The labor force participation
rate in the economy is equal to:

(A) U/(U + E).

(B) E/(U + E).

(C) U/(U + E + NLF).

(D) E/(U + E + NLF).

(E) (U + E)/(U + E + NLF).

Answer : (E)

55. Which of the following is true of the labor force participation rate?

(A) When workers become unemployed, the labor force participation rate declines.

(B) When the unemployed become discouraged workers, the labor force participation rate declines.

(C) When workers do not fully use their skills, the labor force participation rate decreases.

(D) Since the 1950s, the labor force participation rate of women has decreased in the United States.
(E) The trend toward earlier retirement has increased the labor force participation rate in the United
States.

Answer : (B)

56. The labor force participation rate for women in the United States has .

(A) stayed the same over the last 30 years

(B) increased significantly since the 1950s

(C) decreased significantly since the 1950s

(D) fluctuated substantially both upward and downward since the 1950s

(E) increased only very slightly since the 1950s

Answer : (B)

57. Which of the following is true of labor force participation rates in the United States since the
1950s?

(A) The rates for both men and women have risen.

(B) The rate for women has fallen; the rate for men has risen.

(C) The rate for men has fallen; the rate for women has increased.

(D) The rates for both men and women have fallen.

(E) The rates for both men and women have remained fairly constant.

Answer : (C)

58. Which of the following groups tends to have the highest unemployment rate in the United
States?

(A) African American teenagers

(B) Workers, age 25 or older, who are college graduates

(C) White women

(D) Workers, 25 years of age or older, who are high school dropouts

(E) White teenagers

Answer : (A)

59. Which of the following groups experiences high unemployment rates?

(A) White-collar professionals

(B) Attorneys

(C) Technical workers

(D) Blue-collar workers

(E) Web page designers

Answer : (D)

60. In April 2010, the U.S. economy added 290,000 jobs but the unemployment rate still increased
from 9.7 percent to 9.9 percent. Which of the following best explains this situation?

(A) The size of the labor force shrunk.

(B) The number of unemployed workers also increased, but by a smaller percentage.

(C) The number of illegal immigrants increased substantially.

(D) The number of discouraged workers increased substantially.

(E) The number of unemployed workers also increased, but by an even greater percentage.

Answer : (E)

61. After graduating from Harvard Law School, Anne started looking for a job. She could not find a
job after looking for one week. Which of the following is true in this case?

(A) This is an example of frictional unemployment.

(B) This is an example of cyclical unemployment.

(C) This is an example of seasonal unemployment.

(D) She is underemployed.

(E) She is a discouraged worker.

Answer : (A)

62. Which of the following statements is true of unemployment?

(A) Cyclical unemployment decreases during recessions and increases during expansions.

(B) Some unemployment exists even when the economy is healthy and growing.

(C) Unemployment and inflation are not related.

(D) People who are willing and able to work but have given up the search for a job are considered
unemployed.
(E) Voluntary unemployment refers to a situation in which people who really do not want to work
only pretend to look for jobs.

Answer : (B)

63. Frictional unemployment refers to unemployment that is a result of:

(A) a mismatch of skills.

(B) being out of work 27 weeks or longer.

(C) job search.

(D) seasonal decreases in demand for labor.

(E) a recession in the economy.

Answer : (C)

64. Jacqueline has a Ph.D. in economics. She has turned down many job offers because she
eventually hopes to teach at one of the top ten universities in her field. The type of unemployment
she is experiencing is:

(A) frictional unemployment.

(B) structural unemployment.

(C) seasonal unemployment.

(D) cyclical unemployment.

(E) underemployment.

Answer : (A)

65. Which type of unemployment is most likely to help an economy become more efficient?

(A) Cyclical unemployment

(B) Voluntary unemployment

(C) Seasonal unemployment

(D) Frictional unemployment

(E) Underemployment

Answer : (D)

66. The best example of a frictionally unemployed worker is one who:

(A) has been looking for work for 27 weeks or longer.

(B) is laid off during a recessionary period in the economy.

(C) is in the process of voluntarily switching jobs.

(D) is discouraged and not actively seeking work.

(E) cannot find a job that matches with his skills.

Answer : (C)

67. The type of unemployment most likely to be experienced by a touring professional golfer is:

(A) frictional unemployment.

(B) structural unemployment.

(C) seasonal unemployment.

(D) cyclical unemployment.

(E) discouraged-worker unemployment.

Answer : (C)

68. The impact of unemployment is removed from official monthly unemployment figures.

(A) cyclical

(B) structural

(C) seasonal

(D) frictional

(E) involuntary

Answer : (C)

69. If the official unemployment rate increases from December to January because the Christmas
season is over, we can conclude that is responsible for the increase.

(A) seasonal unemployment

(B) cyclical unemployment

(C) structural unemployment

(D) frictional unemployment

(E) underemployment
Answer : (A)

70. Structural unemployment refers to unemployment that results from:

(A) inefficiencies in the market for labor that prolong the job search.

(B) being in the wrong geographical location.

(C) the specialization and division of labor.

(D) seasonal decreases in demand for labor.

(E) a recession in the economy.

Answer : (B)

71. Unemployment arising from a mismatch of skills is called:

(A) frictional unemployment.

(B) structural unemployment.

(C) seasonal unemployment.

(D) cyclical unemployment.

(E) underemployment.

Answer : (B)

72. Which of the following types of unemployment is the hardest to reduce?

(A) Cyclical unemployment

(B) Structural unemployment

(C) Voluntary unemployment

(D) Frictional unemployment

(E) Seasonal unemployment

Answer : (B)

73. In recent times, there has been a decline in the sale of newspapers in the U.S. as people prefer
to read the news on the internet. This has caused many newspaper journalists to lose their jobs. This
is an example of:

(A) structural unemployment.

(B) frictional unemployment.

(C) cyclical unemployment.

(D) seasonal unemployment.

(E) underemployment.

Answer : (A)

74. Juanita worked for a defense contractor in the United States. During the 2008 recession, the
government cut spending and Juanita and ninety-nine others were laid off. In such a case, the
unemployment Juanita is experiencing is .

(A) cyclical

(B) structural

(C) seasonal

(D) frictional

(E) voluntary

Answer : (A)

75. In 2004, Jamal lost his job as a shipbuilder. His shipyard never reopened, and his very
specialized skills as a shipbuilder were no longer in demand. Jamal's unemployment is best classified
as .

(A) cyclical

(B) structural

(C) seasonal

(D) frictional

(E) voluntary

Answer : (B)

76. unemployment is experienced by a customer service representative who is laid off from a
job because new technology reduces the need for people to handle customer service inquiries.

(A) Seasonal

(B) Cyclical

(C) Voluntary

(D) Structural
(E) Frictional

Answer : (D)

77. Which of the following is most likely to reduce structural unemployment?

(A) A reduction in wage rates

(B) Access to better information on local job openings

(C) Retraining workers in marketable skills

(D) Promotion of full employment through government stabilization policies

(E) Reducing the cost of job loss through enhanced unemployment benefits

Answer : (C)

78. Which type of unemployment is likely to decrease the most during an economy's boom?

(A) Frictional unemployment

(B) Seasonal unemployment

(C) Structural unemployment

(D) Cyclical unemployment

(E) Underemployment

Answer : (D)

79. Which type of unemployment is likely to increase the most during an economy's recession?

(A) Frictional unemployment

(B) Seasonal unemployment

(C) Structural unemployment

(D) Cyclical unemployment

(E) Underemployment

Answer : (D)

80. Recently, banking has become easier with automated teller machines replacing bank tellers. The
loss of tellers' jobs is an example of .

(A) cyclical unemployment

(B) structural unemployment

(C) frictional unemployment

(D) underemployment

(E) voluntary unemployment

Answer : (B)

81. In which of the following industries are workers least likely to suffer from cyclical
unemployment?

(A) Construction industry

(B) Automobile manufacturing

(C) Apparel industry

(D) Education

(E) Tourism

Answer : (D)

82. Cyclical unemployment results from:

(A) a mismatch of skills.

(B) being in the wrong geographical location.

(C) monetary cost and the time it takes to find the best job.

(D) seasonal decreases in demand for labor.

(E) prolonged declines in business activity.

Answer : (E)

83. If the official unemployment rate increases from February to March because of sluggish sales in
the automobile industry, then the increase can be blamed on:

(A) seasonal unemployment.

(B) cyclical unemployment.

(C) structural unemployment.

(D) frictional unemployment.

(E) underemployment.
Answer : (B)

84. When an economy is operating at full employment, .

(A) structural unemployment does not exist

(B) cyclical unemployment does not exist

(C) the unemployment rate is zero

(D) seasonal unemployment does not exist

(E) the number of discouraged workers is zero

Answer : (B)

85. Full employment:

(A) exists when, on average, nearly two out of three adults in the labor force are employed.

(B) exists when everyone who wants a job has one.

(C) exists when the unemployment rate is zero.

(D) exists when everyone in the labor force has a job.

(E) will always include some unemployment.

Answer : (E)

86. Which of the following does not exist when an economy is operating at full employment?

(A) An unemployment rate of 5 percent or 6 percent

(B) Seasonal unemployment

(C) Structural unemployment

(D) Cyclical unemployment

(E) Frictional unemployment

Answer : (D)

87. Full employment is considered a major economic goal because:

(A) specialization is not possible without full employment.

(B) economic growth can only occur when there is full employment.

(C) the opportunity cost of unemployment is lost production.

(D) profit maximization of firms can only occur when there is full employment.

(E) inflation will be lower when full employment is achieved.

Answer : (C)

88. An individual with a Ph.D. in physics who can find employment only in a pizza parlor would be
considered:

(A) discouraged.

(B) underemployed.

(C) overemployed.

(D) voluntarily unemployed.

(E) long-term unemployed.

Answer : (B)

89. An increase in unemployment benefits is likely to:

(A) reduce a person's incentive to look for work.

(B) reduce the opportunity cost of remaining employed.

(C) provide a better safety net for employed families.

(D) decrease the tax imposed on consumers.

(E) increase the need to accept the first job available after becoming unemployed.

Answer : (A)

90. Which of the following will most likely qualify for unemployment compensation benefits?

(A) A new college graduate who cannot find work despite a desperate job search

(B) An unemployed coal miner who has been receiving benefits for the past six months

(C) A former retail clerk who quit her job because the boss was too demanding

(D) A spot welder who has just gotten his first "pink slip" in the mail after ten years of continuous
employment

(E) An accountant who was fired from his last position for drinking alcohol on the job

Answer : (D)

91. The official unemployment rate disguises the extent of the unemployment problem because:
(A) children are not counted as unemployed.

(B) retired persons are not counted as unemployed.

(C) full-time students are not counted as unemployed.

(D) discouraged workers are counted as unemployed.

(E) people overqualified for their current job are not considered unemployed.

Answer : (E)

92. Not counting as unemployed understates unemployment.

(A) children

(B) retired persons

(C) students

(D) people who do not want to work

(E) discouraged workers

Answer : (E)

93. Underemployment refers to:

(A) seasonal unemployment.

(B) people working full time though they would rather work part time.

(C) the unemployment that occurs when the actual level of employment is less than the full
employment level.

(D) people working in jobs that do not fully use their skills.

(E) people working part time.

Answer : (D)

94. The unemployment rate does not reflect the true extent of the unemployment problem. Which of
the following groups is not counted as unemployed in the official unemployment statistics?

(A) The underemployed and the cyclically unemployed

(B) The underemployed and discouraged workers

(C) Discouraged workers and the frictionally unemployed

(D) The frictionally unemployed and the structurally unemployed

(E) The cyclically unemployed and the frictionally unemployed

Answer : (B)

95. The official unemployment rate would be higher if it included the existence of hidden
unemployment or individuals who are:

(A) on unemployment compensation.

(B) not working.

(C) working part time but prefer full-time work.

(D) voluntarily retired.

(E) unemployed and looking for work.

Answer : (C)

96. Which of the following factors makes the official unemployment rate an overstatement of the
actual level of unemployment in the economy?

(A) Inclusion of discouraged workers

(B) Inclusion of those only working part time

(C) Inclusion of those who are overqualified for their current jobs

(D) Inclusion of those who are marginally attached to the labor force

(E) Inclusion of those who pretend to look for work in order to qualify for welfare programs

Answer : (E)

97. Inflation is:

(A) a reduction in everyone's standard of living.

(B) a rise in the real prices of all goods and services.

(C) a general and continuing rise in the money prices of goods and services.

(D) a continuing rise in everyone's standard of living.

(E) an increase in the value of money compared to the value of goods.

Answer : (C)

98. Which of the following periods was not characterized by inflation in the U.S. economic history?

(A) 1917-1920
(B) 1929-1933

(C) 1947

(D) 1978-1980

(E) 1980-1989

Answer : (B)

99. Suppose the price levels in an economy in four successive years are 100, 120, 133, and 140.
Which of the following is true in such a case?

(A) The economy is experiencing hyperinflation.

(B) The economy is experiencing deflation.

(C) The economy is experiencing inflation.

(D) The economy is experiencing increasing inflation.

(E) The economy is experiencing disinflation.

Answer : (C)

100. The inflation experienced in the United States during the late 1960s as a result of the spending
on the Vietnam War is an example of:

(A) hyperinflation.

(B) demand-pull inflation.

(C) disinflation.

(D) cost-push inflation.

(E) cyclical inflation.

Answer : (B)

101. The inflation experienced in the United States during the 1970s as a result of OPEC oil price
increases is an example of:

(A) demand-pull inflation.

(B) hyperinflation.

(C) cost-push inflation.

(D) cyclical inflation.

(E) disinflation.
Answer : (C)

102. If the aggregate demand curve shifts rightward, then .

(A) the price level increases and output decreases

(B) the resulting increase in the price level is usually called cost-push inflation

(C) the resulting increase in the price level is usually called demand-pull inflation

(D) the price level increases as long as the aggregate supply curve shifts leftward

(E) the price level decreases and output decreases

Answer : (C)

103. If the aggregate supply curve shifts leftward, then .

(A) the price level increases and output increases

(B) the resulting increase in the price level is usually called cost-push inflation

(C) the resulting increase in the price level is usually called demand-pull inflation

(D) the price level increases as long as the aggregate demand curve shifts rightward

(E) the price level decreases and output increases

Answer : (B)

104. Inflation can be caused:

(A) only by increases in aggregate demand.

(B) only by increases in aggregate supply.

(C) only by decreases in aggregate supply.

(D) by increases in aggregate supply or decreases in aggregate demand.

(E) by increases in aggregate demand or decreases in aggregate supply.

Answer : (A)

105. The following image shows the aggregate demand and aggregate supply curves of an economy.
In the graph below, the rise in the price levels from P1 to P2 is a result of:

Figure 7.1
(A) cost-pull inflation.

(B) cost-push inflation.

(C) demand-push inflation.

(D) demand-pull inflation.

(E) induced inflation.

Answer : (D)

106. Cost-push inflation:

(A) occurs when the aggregate demand curve shifts rightward.

(B) occurs when the aggregate supply curve shifts rightward.

(C) results in a decrease in the unemployment rate.

(D) results in a movement along the aggregate demand curve.

(E) is caused by the same factors that lead to demand-pull inflation.

Answer : (D)

107. One of the most widely reported measures of inflation is the:

(A) consumer price index.

(B) producer price index.

(C) GDP deflator.

(D) Gini coefficient.

(E) real interest rate.

Answer : (A)
108. The consumer price index measures:

(A) the cost of all goods and services produced in the U.S. economy.

(B) the average change over time in the selling prices received by domestic producers for their
output.

(C) the cost of a fixed market basket of consumer goods and services produced in the U.S. economy.

(D) the ratio of an economy's nominal GDP to its real GDP.

(E) the income distribution of an economy.

Answer : (C)

109. If the CPI in the United States was 150 in 2003 and 160 in 2004, the inflation rate over the
year is .

(A) 10 percent

(B) 20 percent

(C) 7 percent

(D) 30 percent

(E) 50 percent

Answer : (C)

110. If the CPI is 200, then the price level has since the base year.

(A) doubled

(B) quadrupled

(C) tripled

(D) increased five times

(E) increased six times

Answer : (A)

111. Which of the following is true about U.S. history prior to the 1950s?

(A) The inflation rate remained constant during this period.

(B) Cost-push inflation led to depressions, which were followed by slowly-rising price levels.

(C) The price level remained constant during this period.

(D) Major wars resulted in high inflation rates, after which the inflation rate tapered off.

(E) Major wars resulted in high inflation rates that were usually followed by deflation.

Answer : (E)

112. Which of the following decades was characterized by the highest inflation rate in the U.S.?

(A) 1920s

(B) 1930s

(C) 1950s

(D) 1970s

(E) 1960s

Answer : (D)

113. Since the end of World War II, the U.S. price level has:

(A) increased tenfold.

(B) increased by an average of 10 percent each year.

(C) increased and decreased with equal regularity, leaving the price level almost constant.

(D) increased by 50 percent.

(E) doubled.

Answer : (A)

114. Since 1980, has experienced deflation.

(A) the U.S.

(B) France

(C) Germany

(D) Japan

(E) Italy

Answer : (D)

115. Since World War II, the consumer price index has increased by an average of .

(A) 1.4 percent per year

(B) 2.1 percent per year

(C) 6.4 percent per year

(D) 5.6 percent per year

(E) 3.5 percent per year

Answer : (E)

116. Which of the following is likely to be an effect of inflation?

(A) An increase in the willingness of lenders to lend money for longer periods

(B) A decrease in the willingness of borrowers to borrow money for longer periods

(C) A decrease in the purchasing power of lenders in the economy

(D) An increase in the willingness of people to buy bonds as a hedge against rising prices

(E) An increase in the willingness of people to buy physical assets as a hedge against rising prices

Answer : (C)

117. Suppose the nominal wages of workers in an economy increase by 7 percent while the price
level rises by 5 percent. The real wages:

(A) would increase by about 2 percent.

(B) would decrease by about 5 percent.

(C) would increase by about 50 percent.

(D) would increase by about 10 percent.

(E) would decrease by about 25 percent.

Answer : (A)

118. Suppose there is a 3 percent increase in the nominal wages of workers in an economy. The
annual rate of inflation in the economy is about 6 percent. Which of the following is true in this case?

(A) Real wages would fall by about 3 percent.

(B) Real wages would increase by about 20 percent.

(C) Real wages would fall by about 25 percent.

(D) Real wages would increase by about 50 percent.

(E) Real wages would increase by about 10 percent.

Answer : (A)

119. Suppose there is a 5 percent increase in the nominal wages of workers in an economy. The
annual rate of inflation in the economy is about 2 percent. Which of the following is true in this case?

(A) Real wage would fall by about 10 percent.

(B) Real wage would increase by about 20 percent.

(C) Real wage would fall by about 25 percent.

(D) Real wage would increase by about 50 percent.

(E) Real wage would increase by about 3 percent.

Answer : (E)

120. A decrease in a person's real wage necessarily means:

(A) lower purchasing power.

(B) a lower nominal wage.

(C) a lower personal disposable income.

(D) a higher nominal wage.

(E) a higher personal disposable income.

Answer : (A)

121. If the inflation rate in an economy is 5 percent and the income earned by workers increases by
5 percent, then .

(A) nominal income declines and real income increases

(B) both nominal income and real income increase by 5 percent

(C) nominal income increases and real income declines

(D) both nominal income and real income decrease by 5 percent

(E) nominal income increases by 5 percent and real income is unchanged

Answer : (E)

122. Suppose an economy had an inflation rate of 7 percent last year. This has decreased to 6
percent this year. This means that the economy is:

(A) suffering from hyperinflation.

(B) experiencing deflation.

(C) experiencing disinflation.

(D) experiencing a wage-price spiral.

(E) experiencing a decrease in real wage.

Answer : (C)

123. If the inflation rate in an economy is higher than expected, which of the following groups in the
society would be most likely to gain?

(A) Borrowers

(B) Lenders

(C) Persons holding large amounts of money

(D) Persons on fixed incomes

(E) Workers under contract without a cost of living adjustment

Answer : (A)

124. Which of the following is true about inflation?

(A) Inflation promotes social harmony by uniting people against the government.

(B) Inflation is more damaging if it is unanticipated.

(C) Accurate anticipation of inflation is possible for everyone who is well informed about economic
events.

(D) Those who lend money at a rate above the rate of inflation suffer economic losses.

(E) If people accurately anticipate inflation, their actions will prevent it.

Answer : (B)

125. The higher the expected inflation, .

(A) the higher the nominal rate of interest that lenders require and that borrowers are willing to pay

(B) the lower the nominal rate of interest that lenders require and that borrowers are willing to pay

(C) the higher the nominal rate of interest that lenders require and the lower the nominal rate of
interest that borrowers are willing to pay

(D) the higher the real interest rate that lenders require

(E) the higher the real interest rate that borrowers are willing to pay
Answer : (A)

126. If inflation is much higher than originally anticipated, are better off and are worse
off.

(A) lenders who extended loans at fixed interest rates; people who borrowed at fixed interest rates

(B) people who borrowed at fixed interest rates; banks that extended loans at fixed interest rates

(C) retired people living on a fixed income; people who had borrowed fixed interest rate loans

(D) people who deposited their savings at fixed interest rates; banks that accepted deposits at fixed
interest rates

(E) oil refiners who signed labor contracts agreeing to pay their workers the cost-of-living wage;
workers who receive that cost-of-living wage

Answer : (B)

127. The higher the anticipated inflation rate, .

(A) the more workers will ask for in wages and the more firms will agree to pay

(B) the more workers will ask for in wages and the less firms will agree to pay

(C) the less workers will ask for in wages and the less firms will agree to pay

(D) the higher the real wage increases offered by firms

(E) the higher the real wage increases asked for by workers

Answer : (A)

128. During periods when the inflation rate fluctuates widely, .

(A) the nominal interest rate and the real interest rate are identical

(B) all money prices rise at the same rate, causing relative prices to increase

(C) suppliers link the selling prices of their goods to the overall inflation rate

(D) uncertainty about changes in relative prices causes a decrease in economic efficiency

(E) all money prices increase at the same rate, leaving relative prices constant

Answer : (D)

129. If the expected inflation rate is 4 percent and the nominal interest rate is 9 percent, the
expected real interest rate is .
(A) 13 percent

(B) −5 percent

(C) 9 percent

(D) −13 percent

(E) 5 percent

Answer : (E)

130. If future price changes were perfectly anticipated by both borrowers and lenders, then .

(A) the expected real interest rate would be higher than the actual rate

(B) the expected real interest rate would lower than the actual rate

(C) the real interest rate in the future would decrease by the amount of the price increase

(D) the real interest rate in the future would increase by the amount of the price increase

(E) the real interest rate in the future would remain unchanged

Answer : (E)

131. In periods of high inflation, .

(A) people want to hold as much money as possible

(B) the purchasing power of money decreases

(C) the real interest rate exceeds the nominal interest rate

(D) the nominal interest rates are likely to be low

(E) the nominal interest rate equals the real interest rate

Answer : (B)

132. The nominal interest rate:

(A) varies directly with the rate of expected inflation in an economy.

(B) is the interest rate expressed in dollars of constant purchasing power.

(C) equals the difference between the real interest rate and the inflation rate.

(D) is the basis for decisions taken by the lenders and the borrowers in an economy.

(E) is the percentage increase in the average price level from one year to the next.
Answer : (A)

133. A worker would be hurt least by inflation when the:

(A) worker anticipates inflation and increases savings at the bank.

(B) worker is protected by a cost-of-living adjustment clause in an employment contract.

(C) the price level increases but at a decreasing rate.

(D) worker is protected by fixed annual increases in wages and benefits in an employment contract.

(E) government increases the level of social security retirement benefits to correct for the effects of
unanticipated inflation.

Answer : (B)

134. Uncertainty about inflation:

(A) shifts the attention of business managers away from exchange rate movements and toward
concerns about productivity.

(B) reduces the difficulty of making international business decisions.

(C) make suppliers link the selling prices of their goods to the overall inflation rate.

(D) undermines money's importance as a link between the present and the future.

(E) makes contracts easier to negotiate.

Answer : (D)

135. Unanticipated inflation penalizes:

(A) those who are saving.

(B) those who are borrowing.

(C) governments.

(D) those who are in high-growth industries where wages are growing faster than prices.

(E) those who can't find jobs at any wage rate.

Answer : (A)

136. The problems of inflation are caused primarily by:

(A) greed on the part of sellers.

(B) uncertainty about inflation.

(C) too much incentive to lend money.

(D) greed on the part of union leaders.

(E) governments' actions to reduce the effects of inflation.

Answer : (B)

137. In the market for loanable funds, the equilibrium interest rate is determined by the intersection
of:

(A) the downward-sloping supply curve for loanable funds and the upward-sloping demand curve for
loanable funds.

(B) the upward-sloping supply curve for loanable funds and the downward-sloping demand curve for
loanable funds.

(C) the downward-sloping supply curve of loanable funds and the horizontal demand curve for
loanable funds.

(D) the downward-sloping supply curve of loanable funds and the vertical demand curve for loanable
funds.

(E) the upward-sloping supply curve for loanable funds and the horizontal demand curve for loanable
funds.

Answer : (B)

138. If the nominal interest rate is 5 percent and there is no inflation, .

(A) the real interest rate exceeds 5 percent

(B) the real interest rate is less than 5 percent

(C) the real interest rate is 5 percent

(D) there is not enough information to determine the real interest rate

(E) the real interest rate is zero

Answer : (C)

139. If two parties to a loan contract agree that the lender should earn an 8 percent increase in
purchasing power as a result of a loan and if the inflation rate is 5 percent, the nominal interest rate
is .

(A) 13 percent

(B) 8 percent

(C) 5 percent
(D) 3 percent

(E) 1 percent

Answer : (A)

140. An increase in the interest rate, other things constant, will:

(A) shift the supply of loanable funds curve to the left.

(B) shift the supply of loanable funds curve to the right.

(C) increase the quantity of loanable funds supplied.

(D) shift the demand for loanable funds curve to the left.

(E) increase the quantity of loanable funds demanded.

Answer : (C)

141. A decrease in the interest rate, other things constant, will:

(A) shift the supply of loanable funds curve to the left.

(B) shift the supply of loanable funds curve to the right.

(C) decrease the quantity of loanable funds demanded.

(D) decrease the quantity of loanable funds supplied.

(E) shift the demand for loanable funds curve to the right.

Answer : (D)

142. A decrease in the interest rate, other things constant, will:

(A) shift the demand for loanable funds curve to the right.

(B) shift the demand for loanable funds curve to the left.

(C) increase the quantity of loanable funds demanded.

(D) increase the quantity of loanable funds supplied.

(E) shift the supply of loanable funds curve to the right.

Answer : (C)

143. An increase in the interest rate, other things constant, will:

(A) shift the demand for loanable funds curve to the right.
(B) shift the demand for loanable funds curve to the left.

(C) decrease the quantity of loanable funds supplied.

(D) decrease the quantity of loanable funds demanded.

(E) shift the supply of loanable funds curve to the right.

Answer : (D)

144. Which of the following is likely to happen if people suddenly become more willing to lend
money?

(A) An increase in demand for loanable funds will increase the interest rate.

(B) An increase in the supply of loanable funds will increase the interest rate.

(C) An increase in the supply of loanable funds will decrease the interest rate.

(D) An increase in demand for loanable funds will decrease the interest rate.

(E) A simultaneous increase in both the supply of and demand for loanable funds makes it impossible
to predict what will happen to the rate of interest.

Answer : (C)

145. Raul borrowed $1,000 from Marta for a year and agreed to repay her $1,050 at the end of the
year. If the inflation rate was 3 percent, which of the following is the real rate of interest Marta
received?

(A) 10 percent

(B) 5 percent

(C) 3 percent

(D) 2 percent

(E) −2 percent

Answer : (D)

146. Tony lent Dave $1,000 for one year with the understanding that Dave would repay $1,070. If
the actual inflation rate was 7 percent, then the real rate of interest Tony received is .

(A) 14 percent

(B) 7 percent

(C) 4 percent
(D) 0 percent

(E) −7 percent

Answer : (D)

147. Which of the following events would most likely cause the nominal interest rate to fall?

(A) A decrease in the supply of loanable funds

(B) An increase in the demand for loanable funds

(C) An increase in the supply of loanable funds and an increase in the demand for loanable funds

(D) An increase in the supply of loanable funds and a decrease in the demand for loanable funds

(E) A decrease in the supply of loanable funds and an increase in the demand for loanable funds

Answer : (D)

148. Inflation:

(A) always reduces real income.

(B) never reduces real income.

(C) reduces the real income of workers when wages increase more than prices do.

(D) reduces the real income of workers when wages increase less than prices do.

(E) increases the real income of workers only when wages increase less than prices do.

Answer : (D)

149. Which of the following people is least likely to be hurt by inflation?

(A) A salesperson who works on commission

(B) A retired couple living on a pension

(C) An individual who enters into a fixed-wage contract for the next three years

(D) An individual who agrees to lend money at a fixed rate of interest for the next three years

(E) An individual working at the minimum wage which seldom changes

Answer : (A)

150. The benefits paid by the largest pension program in the United States are:

(A) not adjusted for changes in the price level.

(B) adjusted for changes in the price level.

(C) revised every five years.

(D) adjusted for changes in the nominal rate of interest.

(E) adjusted for changes in the real rate of interest.

Answer : (B)