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Macroeconomics, 6e (Williamson)
Chapter 6 Search and Unemployment
6.1 Multiple-Choice Questions
1) If N is the working-age population, Q is the labor force, and U is the number of unemployed,
then the unemployment rate is measured as
A) U/N
B) U/Q
C) U/(N-Q)
D) Q/N
Answer: B
LO: 6.1: List the key labor market facts concerning the unemployment rate, the participation
rate, and the employment/population ratio.
Difficulty: moderate
Classification: concept
AACSB: application of knowledge
then the participation rate is measured as
A) U/N
B) Q/U
C) Q/N
D) (Q-U)/N
Answer: C
Difficulty: difficult
then the employment/population ratio is measured as
A) N/Q
B) U/Q
C) (Q-U)/N
1
Copyright © 2018 Pearson Education, Inc.
D) Q/N
Answer: C
2
4) A key determinant of the unemployment rate is
A) labour market unrest.
B) nominal interest rates.
C) aggregate consumption.
D) aggregate economic activity.
Answer: D
5) Percentage deviations from trend in unemployment are

A) procyclical and have been larger than the percentage deviations from trend in real GDP.
B) procyclical and have been smaller than the percentage deviations from trend in real GDP.
C) countercyclical and have been larger than the percentage deviations from trend in real GDP.
D) countercyclical and have been smaller than the percentage deviations from trend in real GDP.
Answer: D
Difficulty: easy
then the employment/population ratio is measured as
A) N/Q
B) U/Q
C) (Q-U)/N
D) Q/N
Answer: C
3
7) The unemployment rate is
A) countercyclical
B) procyclical
C) a leading variable
D) smooth
Answer: A
8) In the 1948-2012 data, the unemployment rate was highest in

A) 2009
B) 1991
C) 1975
D) 1982
Answer: D
Classification: application
AACSB: analytical thinking
9) The average unemployment rate was lowest during what period?

A) 1980-1990
B) 1950-1970
C) 2000-2010
D) 1980-2000
Answer: B
10) The participation rate is

A) countercyclical.
B) more variable than GDP.
C) procyclical.
D) a leading variable.
Answer: C
Difficulty: easy
4
11) The participation rate was higher in 2012 than in 1948 because
A) the labor force was larger in 2012 than in 1948.
B) the unemployment rate became less variable over time.
C) of the Great Moderation.
D) the participation rate of women rose between 1948 to 2012.
Answer: D
12) The employment/population ratio is

A) more volatile than the participation rate.
B) roughly constant over time.
C) less volatile than the participation rate.
D) smaller in 2012 than in 1970.
Answer: A
13) Government intervention influences the unemployment rate through

A) its monetary policies.
B) its tax policies.
C) its regulations.
D) unemployment insurance.
Answer: D
14) Which of the following best describes mismatch that can increase the unemployment rate?
A) a decrease in the availability of information for firms about the skills of workers
B) firms move production to Mexico
C) an increase in the availability of information for firms about the skills of workers
D) an overall decrease in the available skills of the labour force
Answer: A
LO: 6.2 Describe the Beveridge curve, and explain its importance.
5
15) Sectoral shifts influences the unemployment rate through
A) a shift away from services industries and toward manufacturing industries.
B) a shift away from manufacturing industries and toward services industries.
C) a shift away from blue collar jobs and toward services industries.
D) a shift way from white collar jobs and toward blue collar jobs.
Answer: B
Difficulty: easy
16) If A is the number of job vacancies in the aggregate, Q is the labor force, and U is the
number of unemployed, then the vacancy rate is measured by
A) A/(A+Q-U)
B) A/(Q
C) A/(A+Q+U)
D) U/(A+Q-U)
Answer: A
17) The negative correlation between the vacancy rate and the unemployment rate is called
A) The Laffer curve.
B) The Phillips curve.
C) The Fisher relation.
D) The Beveridge curve.
Answer: D
18) From 2009 to 2012

A) The Beveridge curve became flat.
B) The Beveridge curve shifted to the right.
C) The Beveridge curve cannot be discerned in the data.
D) The Beveridge curve shifted to the left.
Answer: B
6
19) In the one-sided search model, the welfare of an employed worker
A) is convex in the real wage.
B) decreases with the real wage.
C) is a concave function of the real wage.
D) increases with employment insurance benefits.
Answer: C
LO: 6.3: In the one-sided search model, explain how the reservation wage is determined.
20) In the one-sided search model, an increase in the separation rate

A) reduces the welfare of an employed worker.
B) increases the welfare of an unemployed worker.
C) reduces wages.
D) increases the employment insurance benefit.
Answer: A
Difficulty: easy
21) In the one-sided search model, the welfare of an unemployed worker

A) is independent of employment insurance benefits.
B) increases with the size of the employment insurance benefit.
C) decreases as market wages increase.
D) depends only on government intervention in labor markets.
Answer: B
22) In the one-sided search model, a decrease in the fraction of the unemployed receiving job
offers
A) increases the welfare of the employed.
B) reduces the welfare of the employed.
C) reduces the welfare of the unemployed.
D) increases the welfare of the unemployed.
Answer: C
7
23) The reservation wage
A) is the wage paid to the reserve army of the unemployed.
B) cannot be higher than the employment insurance benefit.
C) should be the same as the employment insurance benefit, if employment insurance is to be
efficient.
D) is the wage at which an unemployed worker is just indifferent to accepting a job and turning it
down.
Answer: D
24) In the one-sided search model, if an unemployed worker turns down a job offer,
A) he or she continues to search.
B) he or she is not behaving optimally.
C) he or she foregoes employment insurance.
D) he or she quits searching and drops out of the labor force.
Answer: A
25) In the one-sided search model, if the employment insurance benefit goes down,
A) the reservation wage goes down.
B) the reservation wage goes up.
C) the welfare of the unemployed goes up.
D) the government sector shrinks.
Answer: B
Difficulty: easy
26) In the one-sided search model, if the employment insurance benefit goes down,
A) the reservation wage goes up and long-run unemployment goes down.
B) the reservation wage goes down and long-run unemployment goes down.
C) the reservation wage and long-run unemployment are unchanged.
D) the reservation wage goes up and long-run unemployment goes up
Answer: B
LO: 6.4: Show how the one-sided search model determines the unemployment rate.
8
27) In the one-sided search model, if the job offer rate goes down,
A) the reservation wage goes down and the effect on long-run unemployment is ambiguous.
B) the reservation wage goes up and long-run unemployment goes down.
C) the reservation wage and long-run unemployment are unchanged.
D) the reservation wage goes up and long-run unemployment goes up
Answer: A
LO: 6.5: Use the one-sided search model to determine the effects of changes in the labor market
on the reservation wage and the unemployment rate.
28) In the two-sided search model,

A) There are N firms, Q is the labor force, and N-Q is the vacancy rate.
B) There are N consumers, Q is the labor force, and N+Q is the number of consumers choosing
home production.
C) There are Q consumers, N is the labor force, and N-Q is the number of consumers choosing
home production.
D) There are N consumers, Q is the labor force, and N-Q is the number of consumers choosing
home production.
Answer: D
LO: 6.6: Construct an equilibrium in the two-sided search model.
29) In the two-sided search model, there

A) is a single representative agent.
B) is an exogenously fixed number of firms.
C) are N total consumers and N total firms.
D) are N total consumers
Answer: D
30) In the two-sided search model, the number of firms is

A) endogenous.
B) neither endogenous nor exogenous.
C) fixed.
D) exogenous.
Answer: A
Difficulty: easy
9
A) each consumer decides between searching for work and home production.
B) each consumer decides whether or not to accept a job.
C) each consumer decides whether to start a new business or to seek employment as a worker.
D) each consumer decides whether to stay in his or her existing job or search for a new job.
Answer: A
32) The matching function captures the difficulties in

A) matching heterogeneous firms with heterogenous workers.
B) matching capital with labour.
C) matching heterogenous firms with homogeneous workers.
D) matching homogeneous firms with heterogeneous workers.
Answer: A

A) firms maximize profits.
B) firms determine how much effort they should put into filling job vacancies.
C) firms decide whether or not to enter the labor market by posting vacancies.
D) firms decide whether or not to retain or fire workers.
Answer: C
34) The matching function exhibits all of the following properties except
A) diminishing marginal product of labor.
B) constant returns to scale.
C) increasing in matching efficiency.
D) increasing in inputs of searching consumers and firms.
Answer: A
10
35) The matching function captures the idea that
A) consumers have to be paid to work.
B) supply and demand for labor determine the market wage.
C) it is costly and time-consuming to get firms and workers together to produce output.
D) firms are profit-maximizing.
Answer: C
Difficulty: easy
36) An important feature of the two-sided search model is that

A) would-be workers care not just about the market wage, but about the chances of finding work.
B) firms can fire workers.
C) workers can choose to shirk on the job.
D) firms maximize revenue.
Answer: A
37) Labour market tightness in the two-sided search model is defined by

A) the number of firms divided by the number of consumers searching for work.
B) the number of firms multiplied by the number of consumers searching for work.
C) the number of consumers searching for work divided by the number of firms.
D) the number of employed consumers divided by the number of firms.
Answer: A
38) In the two-sided search model

A) the market wage is equal to the marginal product of labor.
B) the market wage is equal to the marginal rate of substitution of leisure for consumption.
C) the wage is equal to the marginal rate of transformation.
D) the wage is determined by bargaining between the firm and the worker.
Answer: D
11
39) In the two-sided search model
A) the firm threatens the worker with separation and takes all the surplus from the match.
B) the firm's surplus from a match is equal to a constant fraction of total surplus.
C) the firm earns zero profits in a match.
D) when a match occurs, the firm is indifferent between continuing with the match and letting
the worker go.
Answer: B
40) In the two-sided search model, a decrease in the unemployment insurance benefit
A) increases the unemployment rate.
B) reduces labor market tightness.
C) reduces the unemployment rate.
D) reduces the vacancy rate.
Answer: C
LO: 6.7: Use the two-sided search model to explain how shocks to the labor market change
labor force participation, unemployment, vacancies, aggregate output, and labor market
tightness.
Difficulty: easy
41) In the two-sided search model, an increase in the unemployment insurance benefit does not,
under any circumstances
A) increase the vacancy rate.
B) increase the unemployment rate.
C) reduce labor market tightness.
D) reduce the size of the labor force.
Answer: A
tightness.
12
42) In the two-sided search model, a decrease in productivity
A) decreases the unemployment rate.
B) reduces the vacancy rate.
C) increases the unemployment rate.
D) increases the size of the labor force.
Answer: C
tightness.
43) In the two-sided search model, an increase in productivity does not

A) reduce the unemployment rate.
B) increase the vacancy rate.
C) increase labor market tightness.
D) increase the size of the labor force.
Answer: D
tightness.
44) A decrease in matching efficiency

A) can never happen.
B) is due to a change in the productivity of firms.
C) is not related to sectoral shocks.
D) can explain the shift in the Beveridge curve.
Answer: D
tightness.
13
45) In the two-sided search model, a decrease in matching efficiency
A) has no effect on vacancies.
B) reduces the unemployment rate.
C) increases labor market tightness.
D) increases the size of the labor force.
Answer: D
tightness.
Difficulty: easy
6.2 True/False Questions
1) True or False: The labor force participation rate was higher in 2015 than in 1950 because the
labor force participation of men rose.
Answer: FALSE
2) True or False: If the number of unemployed rises and the size of the labor force falls, the
unemployment rate rises.
Answer: TRUE
3) True or False: If people exit the labor force, and the ratio of employed to unemployed is
constant, the unemployment rate falls.
Answer: FALSE
14
4) True or False: The Beveridge curve reflects a positive correlation between the unemployment
rate and the vacancy rate.
Answer: FALSE
5) True or False: Since the 2008-2009 recession, the Beveridge curve in the United States has
shifted to the right.
Answer: TRUE
Difficulty: easy
6) True or False: In the one-sided search model, an increase in the unemployment insurance
benefit increases the welfare of the employed.
Answer: FALSE
7) True or False: In the one-sided search model, if unemployed workers receive job offers with
greater frequency, this increases the welfare of the unemployed.
Answer: TRUE
8) True or False: In the one-sided search model, a reduction in the unemployment insurance
benefit will reduce the reservation wage.
Answer: TRUE
9) True or False: In the one-sided search model, a decrease in the separation rate increases the
reservation wage.
Answer: FALSE
15
10) True or False: In the one-sided search model, in the long run the number of people who are
separated from their jobs each period equals the number who accept job offers of employment.
Answer: TRUE
Difficulty: easy
11) True or False: In the one-sided search model, anything that increases the reservation wage
reduces the unemployment rate.
Answer: FALSE
12) True or False: In the one-sided search model, a decrease in the unemployment insurance
benefit increases the reservation wage and increases the unemployment rate.
Answer: TRUE
13) True or False: In the one-sided search model, an increase in the separation rate increases the
separation rate and lowers the unemployment rate.
Answer: FALSE
14) True or False: In the two-sided search model, an increase in the unemployment insurance
benefit increases the expected benefit to a consumer of searching for a job.
Answer: TRUE
16
15) True or False: In the two-sided search model, there is a fixed number of firms.
Answer: FALSE
Difficulty: easy
16) True or False: In the two-sided search model, there is a labor force participation decision.
Answer: TRUE
17) True or False: In the two-sided search model, a reduction in total factor productivity reduces
labor market tightness.
Answer: TRUE
tightness.
18) True or False: In the two-sided search model, an increase in total factor productivity reduces
the size of the labor force.
Answer: FALSE
tightness.
19) True or False: In the two-sided search model, shocks to matching efficiency explain why the
Beveridge curve is downward-sloping.
Answer: FALSE
tightness.
17
20) True or False: In the two-sided search model, an increase in matching efficiency increases
the size of the labor force.
Answer: TRUE
tightness.
Difficulty: easy
6.3 Essay Questions
1) Discuss how labor force participation has evolved in the United States since 1948, in terms of
total labor force participation and the participation of men and women.
Answer: Since 1948, the total labor force participation rate has increased, though there has been
a decrease since about 2000. The increase in labor force participation from 1948 was due to the
increased participation of women, since the participation rate of men has fallen steadily from
1948 to 2015. Since 2000, the labor force participation rates of both men and women have fallen.
2) Explain what has happened to the Beveridge curve since the beginning of the 2008-2009
recession, and discuss a reason for this.
Answer: The Beveridge curve is a negative relationship between the vacancy rate and the
unemployment rate, observable in the U.S. data. Since the 2008-2009 recession, the Beveridge
curve has shifted out. That is, for a given vacancy rate, the unemployment rate has tended to be
higher after the recession. A possible reason for this, which we can use the two-sided search
model to understand, is that matching efficiency has decreased. That is, there is a poorer match
between the skills that firms desire and the skills possessed by would-be workers. This increases
friction in the labor market, and results in higher unemployment for a given number of vacancies
posted by firms.
18
3) Explain how the reservation wage is determined in the one-sided search model.
Answer: To determine the reservation wage, we assume that the welfare of unemployed workers
is a concave function of the wage they earn, and also depends on the separation rate. The welfare
of unemployed workers depends on the unemployment insurance benefit and how frequently an
unemployed worker receives job offers. An unemployed worker will search until he or she
receives a wage offer that implies that, if he or she accepts it, his or her welfare will be higher
than it would if he or she remained unemployed and continued searching. Therefore, the
reservation wage is determined by the point at which the welfare of the employed worker, as
function of the wage, is equal to the welfare of being unemployed. An unemployed worker will
accept any job offer at the reservation wage or above, and will decline everything else.
4) Explain how the unemployment rate is determined in the one-sided search model.
Answer: The one-sided search model determines the long-run unemployment rate, which is
consistent with equal employment-to-unemployment and unemployment-to-employment flows
in the labor market, given the reservation wage. That is, if the unemployment rate is U, then the
flow from fraction of the population moving from employment to unemployment is (1-U)s,
where s is the separation rate. The flow from unemployment to employment is UpH(w*), where
p is the probability of receiving a job offer for an unemployed worker, and H(w*) is the fraction
of the unemployed who receive a wage offer above the reservation wage w* or above,
conditional on receiving a wage offer. Then, the unemployment rate is determined by the
equation (1-U)s = UpH(w*), given the reservation wage.
Difficulty: easy
5) Determine what happens to the unemployment rate and the reservation wage in the one-sided
search model if the separation rate decreases.
Answer: The decrease in the separation rate increases the welfare of the employed, and thus
serves to reduce the reservation wage — work becomes more attractive, so unemployed workers
are less picky about what they will accept. Then the decrease in the separation rate reduces the
flow of workers from employment to unemployment. The reduction in the reservation wage also
increases the flow of workers form unemployment to employment. Therefore, on net the
unemployment rate will fall in the long run.
19
6) Suppose that all jobs pay a lower wage. In the one-sided search model, determine what
happens to the reservation wage and the unemployment rate, and explain.
Answer: If all jobs pay a lower wage, this shifts down the welfare function of the employed,
which increases the reservation wage. The fact that all wages are lower implies that the function
H(w) shifts down. There are therefore two effects on the flow of workers from unemployment to
employment UpH(w*). Since H(w) is lower for each w, and w* is higher, both effects serve to
reduce the flow of workers from unemployment to employment. As a result, long-term
unemployment must increase.
7) In the two-sided search model, explain what decisions firms make, and how they make them.
Answer: Would-be firms make a decision as to whether they should post a vacancy in an
attempt to hire a worker — to be an active firm — or to remain idle. Posting a vacancy costs the
firm k in recruiting costs. If the firm successfully matches with a worker, it receives the output
from production, z, minus the wage it pays to the worker w. But, the chances of matching with a
worker are given by em(1/j, 1), where e is matching efficiency, m is the matching function, and j
is labor market tightness. In equilibrium, the expected payoff for an firm from posting a vacancy
will be zero, so em(1/j,1)(z-w) - k = 0.
8) In the two sided search model, explain what happens in equilibrium if the unemployment
insurance benefit goes down.
Answer: There are two initial effects, on each side of the labor market. On the supply side,
consumers find it less attractive to search for work, as the payoff is lower should their search
prove to be unsuccessful. On the demand side of the labor market, the payoff to firms from
searching for workers goes up, as the firms can now pay a lower wage — the lower UI benefits
imply that the worker's outside option is lower. This implies that more firms enter the labor
market searching for workers, so labor market tightness goes up. Therefore the unemployment
rate will decline and the vacancy rate will go up. The effect on the size of the labor force is
ambiguous, since workers are discouraged from searching because of lower UI benefits, but the
labor market is tighter, so the chances of finding a job are higher.
tightness.
Difficulty: easy
20
9) Suppose that total factor productivity falls. In the two sided search model, what are the
equilibrium effects, and why?
Answer: On the supply side of the labor market, consumers will face a lower market wage, so
their payoff from searching for work will be lower. On the demand side of the labor market,
firms' profits will be lower, so they will find it more lucrative to search for workers, fewer
vacancies are posted, and labor market tightness declines. The size of the labor force must fall,
the unemployment rate rises, and the vacancy rate falls. Further, there will be fewer successful
matches, as less output is produced in each match, so output declines.
tightness.
10) Suppose that matching efficiency increases. In the two-sided search model, determine the
equilibrium effects, and explain.
Answer: On the supply side of the labor market, the payoff from searching for work increases,
as searching for work is now more likely to result in a match. On the demand side of the market,
firms will achieve a match with higher probability if they post a vacancy, which will increase the
number of vacancies posted, and increase labor market tightness. The labor force will increase,
because labor market tightness and matching efficiency are higher, making it easier to find a job.
In equilibrium, the unemployment rate will fall, but the vacancy rate will remain unaffected
(because the effects of increasing matching efficiency and higher labor market tightness are just
offsetting). There will be more matches in the labor market, so output goes up.
tightness.
21

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Solution Manual for Macroeconomics 6th Edition

Williamson 013447211X 9780134472119

Solution manual: https://testbankpack.com/p/solution-manual-for-macroeconomics-6th-

Test bank: https://testbankpack.com/p/test-bank-for-macroeconomics-6th-edition-williamson-

6.1 Multiple-Choice Questions

5) Percentage deviations from trend in unemployment are

8) In the 1948-2012 data, the unemployment rate was highest in

9) The average unemployment rate was lowest during what period?

10) The participation rate is

12) The employment/population ratio is

13) Government intervention influences the unemployment rate through

18) From 2009 to 2012

20) In the one-sided search model, an increase in the separation rate

21) In the one-sided search model, the welfare of an unemployed worker

28) In the two-sided search model,

29) In the two-sided search model, there

30) In the two-sided search model, the number of firms is

32) The matching function captures the difficulties in

33) In the two-sided search model,

36) An important feature of the two-sided search model is that

37) Labour market tightness in the two-sided search model is defined by

38) In the two-sided search model

43) In the two-sided search model, an increase in productivity does not

44) A decrease in matching efficiency

6.2 True/False Questions

6.3 Essay Questions

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