Macroeconomics 3rd Edition Hubbard Test Bank

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Macroeconomics, 3e (Hubbard/O'Brien) - TB2
Chapter 8 Unemployment and Inflation
8.1 Measuring the Unemployment Rate and the Labor Force Participation Rate
1) The labor force is the sum of

A) employed workers and discouraged workers.
B) employed workers and unemployed workers.
C) employed workers and individuals not looking for work.
D) employed workers and the working age population.
E) unemployed workers and the working age population.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 640/236
Topic: The Household Survey
Objective: LO1: Define unemployment rate and labor force participation rate and understand
how they are computed.
AACSB: Reflective Thinking
Special Feature: None
2) During the recession of 2007-2009, the demand for print advertising has ________ and this
has ________ unemployment in the newspaper industry.
A) increased; reduced
B) increased; increases
C) declined; increased
D) declined; reduced
Answer: C
Topic: Government Policies
Special Feature: Chapter Opener: The Seattle Post-Intelligencer Stops the Presses, Causing
More Job Losses
1
Copyright © 2010 Pearson Education, Inc.
3) Upon your graduation from college, you find that the economy is in recession and the
unemployment rate is relatively high. Nonetheless, you continue along your career path looking
for a new job because
A) the cost of additional education is always higher during recession.
B) high unemployment rates do not usually last for very long.
C) looking for work is your only option.
D) the wages of college graduates do not fall during recession.
Answer: B
Special Feature: Economics in YOUR LIFE!: Should You Change Your Career Plans if You
Graduate During a Recession?
4) The unemployment rate is

A) the percentage of the labor force that is employed.
B) the percentage of the number employed that is unemployed.
C) the percentage of the working-age population that is unemployed.
D) the percentage of the labor force that is unemployed.
E) the percentage of the working-age population that is employed.
Answer: D
Comment: Recurring
Topic: The Unemployment Rate
5) A full-time student who is not working is categorized as

A) unemployed.
B) employed.
C) not in the labor force.
D) a discouraged worker.
E) frictionally unemployed.
Answer: C
Comment: Recurring
2
6) Discouraged workers are classified by the BLS as
A) part of the labor force.
B) out of the labor force.
C) unemployed.
D) employed.
E) part-time employees.
Answer: B
Comment: Recurring
7) Discouraged workers are

A) workers who have a part time job but want a full time job.
B) workers who find their current jobs unfulfilling and are considering a job change.
C) workers who have consistently been looking for work for more than 4 weeks.
D) workers who have stopped looking for work because they believe there are no jobs for them.
Answer: D
Comment: Recurring
8) The labor force participation rate is defined as

A) the percentage of the working-age population that is employed.
B) the percentage of the working-age population that is unemployed.
C) the percentage of the labor force that is employed.
D) the percentage of the labor force that is unemployed.
E) the percentage of the working-age population in the labor force.
Answer: E
Comment: Recurring
Topic: Labor Force Participation
3
9) Mike has been unemployed for over a year. He hasn't looked for a job in the last three months,
but he's just started looking for work again. Because Mike started looking for a new job,
A) the unemployment rate increased.
B) the labor force participation rate decreased.
C) the unemployment rate decreased.
D) the working-age population increased.
Answer: A
Comment: Recurring
10) During the month of May, 10 million workers moved from being classified as "unemployed"
to being classified as "employed." As a result,
A) the unemployment rate rose.
B) the labor force participation rate fell.
C) the unemployment rate fell.
D) the labor force participation rate rose.
Answer: C
Comment: Recurring
11) Which of the following would reduce the labor force participation rate, all else equal?
A) an increase in the number of people in the labor force
B) an increase in the unemployment rate
C) a decrease in the unemployment rate
D) an increase in the working-age population
Answer: D
Comment: Recurring
4
12) Jack lost his job six months ago, and he's been actively looking for a new job ever since. The
Bureau of Labor Statistics would classify Jack as
A) unemployed.
B) out of the labor force.
C) a discouraged worker.
D) all of the above.
Answer: A
Comment: Recurring
13) Which of the following causes the unemployment rate to understate the true extent of
joblessness?
A) Many full time workers really want to be part time workers.
B) Persons who collect unemployment benefits report themselves to be searching for a job.
C) Discouraged workers are not counted as unemployed.
D) A drug dealer reports herself as unemployed.
E) Discouraged workers are counted as unemployed.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 642-643/238-239
Topic: Problems with Measuring the Unemployment Rate
14) The U.S. unemployment rate is highest for

A) white adults.
B) Hispanic adults.
C) black adults.
D) black teenagers.
E) white teenagers.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 643-644/239-240
5
15) If the number employed is 190 million, the working-age population is 230 million, and the
number unemployed is 10 million, then the unemployment rate is
A) 5%.
B) 5.2%.
C) 8%.
D) 10%.
E) 50%.
Answer: A
Comment: Recurring
AACSB: Analytic Skills
16) If the number employed is 190 million, the number unemployed is 10 million, and the
working-age population is 250 million, then the labor force participation rate is
A) 4%.
B) 5.2%.
C) 60%.
D) 76%.
E) 80%.
Answer: E
Comment: Recurring
17) Except for recessions, the duration of unemployment for the typical person lasts
A) less than six months.
B) six to nine months.
C) over nine months.
D) over one year.
E) over five years.
Answer: A
Comment: Recurring
Topic: How Long Are People Typically Unemployed?
6
18) If the number of unemployed workers is 200 million, and the number in the labor force is
500 million, what is the unemployment rate?
A) 0.4%
B) 4%
C) 14%
D) 40%
Answer: D
Comment: Recurring
19) If the number of unemployed workers is 200 million, the number of employed workers is
300 million, and the working-age population is 800 million, what is the labor force participation
rate?
A) 12.5%
B) 37.5%
C) 40%
D) 62.5%
Answer: D
Comment: Recurring
20) If the number of unemployed workers is 19 million, the number in the working-age
population is 500 million, and the unemployment rate is 4%, what is the labor force participation
rate?
A) 4.75%
B) 7.8%
C) 95%
D) 96.2%
Answer: C
Comment: Recurring
7
21) If the number of unemployed workers is 19 million, the number in the working-age
population is 500 million, and the unemployment rate is 4%, how many workers are in the labor
force?
A) 1 million
B) 20 million
C) 475 million
D) 481 million
Answer: C
Comment: Recurring
22) Which of the following describes actual trends in the U.S. labor force participation rate?
A) The labor force participation rate of adult men has risen since 1950.
B) The labor force participation rate of adult women has fallen since 1950.
C) The labor force participation rate of adult men not in school, but too young to retire has risen
since 1950.
D) The labor force participation rate of adult women has risen since 1950.
E) The labor force participation rate of all adults has fallen since 1950.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 643-644/239-240
8
23) What impact would including members of the military in employment, labor force, and
working-age population statistics have on the unemployment rate and the labor force
participation rate?
A) Including members of the military would increase the unemployment rate and reduce the
labor force participation rate.
B) Including members of the military would reduce the unemployment rate and increase the
labor force participation rate.
C) Including the military would increase both the unemployment rate and the labor force
participation rate.
D) Including the military would reduce both the unemployment rate and the labor force
participation rate.
Answer: B
Special Feature: Solved Problem: What Happens if You Include the Military?
24) In the United States in 2009, the gap between the unemployment rate for men and women
A) was virtually nonexistent.
B) got significantly smaller.
C) was comparable to the gap during the recession of 2001.
D) was the highest ever recorded.
Answer: D
Diff: 1 Page Ref: 644-645/240-241
Special Feature: Making the Connection: Why Was Male Unemployment So High During the
Recent Recession?
25) Jack was unemployed two weeks ago but just started a new job. As a result of this increase in
the number of employed workers, which of the following occurred?
A) The labor force participation rate increased.
B) The unemployment rate increased.
C) The labor force participation rate decreased.
D) The unemployment rate decreased.
Answer: D
Comment: Recurring
9
26) Jack just received a promotion at work and now works 50 hours per week instead of 35. As a
result,
A) the unemployment rate increased.
B) the unemployment rate decreased.
C) the labor force participation rate increased.
D) neither the unemployment rate nor the labor force participation rate changed.
Answer: D
Comment: Recurring
27) For the last few decades, the labor force participation rates of men have ________, and the
labor force participation rates of women have ________.
A) risen; risen
B) fallen; fallen
C) risen; fallen
D) fallen; risen
Answer: D
Comment: Recurring
28) The household survey asks adults about their employment status and is used to compile the
monthly unemployment rate.
Answer: TRUE
Comment: Recurring
10
29) The household survey is compiled from firms who answer questions about the number of
persons who are employed and on the company payroll.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 646-647/242-243
Topic: Establishment Survey
30) In recent years, economists have come to rely more on the establishment survey rather than
the household survey to analyze current labor market statistics.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 646-647/242-243
Topic: Establishment Survey
31) The labor force participation rates of men have gradually increased since 1948.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 643-644/239-240
11
Article Summary
In February 2009, the labor force in the United States grew by roughly a half-million
people, increasing unemployment by almost as much as did the sharp decline in jobs. A
smaller proportion of unemployed workers dropped out of the labor force during the
recession of 2007-2009 than in past recessions, and this has increased the unemployment
rate by as much as half a percentage point. Often during a recession, unemployed workers
become discouraged while looking for a job and drop out of the labor force, a situation
referred to as the discouraged worker effect. Other times, additional members of the
household enter the labor force and join the unemployed worker in searching for a job to
compensate for the loss in wages. Research indicates that the discouraged worker effect
tends to be the more common occurrence during a recession, but it was not as prevalent
during the recession of 2007-2009 as it had been during previous post-World War II
recessions in the United States
Source: Alfred Tella, "Tella: Workers and wealth," Washington Times, March 10, 2009.
32) Refer to the Article Summary. How would the labor force growing by a half-million people
lead to an increase in the unemployment rate?
Answer: The labor force is calculated as the sum of employed workers and unemployed workers
in the economy. If the labor force is growing and, simultaneously, the unemployment rate is
increasing, the number of people in the labor force classified as unemployed workers must be
increasing.

Special Feature: Making the Connection: Tella: Workers and Wealth
12
33) How would the unemployment rate and the labor force participation rate change if
discouraged workers were counted as unemployed rather than counted as out of the labor force?
Show using the formula for both measurements.
Answer: The unemployment rate is calculated as:
Number of unemployed
× 100
Labor force
Including discouraged workers would increase the number of people counted as being in the
labor force and would increase the number of people counted as unemployed. In terms of our
calculation, the numerator would rise, and the denominator would rise. However, the numerator
would rise by a greater percentage than the denominator as the denominator is the sum of
employment plus unemployment. If the top number rises more quickly than the bottom number,
then the whole number rises. This would increase the unemployment rate.
The labor force participation rate is calculated as:
Labor force
× 100
Working - age population
Including discouraged workers would increase the number of people in the labor force, but not
change the number of people in the working-age population. This would increase the labor force
participation rate because the numerator increases. Increasing the numerator of a fraction
increases the fraction.
Comment: Recurring
13
34) Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age
population is 250,000, and 50,000 people are out of the labor force. Calculate the unemployment
rate.
Answer: The unemployment rate is calculated as:
Number of unemployed
× 100
Labor force
The labor force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000
which equals 200,000 people. Substituting this information into our equation, we get:
20,000
× 100
200,000
which equals 10%.
Comment: Recurring
35) Suppose 180,000 people are employed, 20,000 people are unemployed, and 50,000 people
are out of the labor force, then calculate the labor force participation rate.
Answer: The labor force participation rate is calculated as:
Labor force
× 100
Working - age population
The labor force is the sum of those employed plus the unemployed. This is 180,000 plus 20,000
which equals 200,000 people. The working-age population is the sum of those in the labor force
and those out of the labor force. This is 200,000 plus 50,000 which equals 250,000. Substituting
this information into our equation, we get:
200,000
× 100
250,000
which equals 80%.
Comment: Recurring
14
8.2 Types of Unemployment
1) The short-term unemployment arising from the process of matching workers with jobs is
called
A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.
E) unnatural unemployment.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 648-649/244-245
Topic: Types of Unemployment
Objective: LO2: Identify the three types of unemployment.
2) Unemployment arising from a persistent mismatch between the skills and characteristics of
workers and the requirements of jobs is called
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 648-649/244-245
3) Workers laid off as a result of a recession suffer

E) natural unemployment.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 648-649/244-245
15
4) People who lost their jobs as hand-drawn animators because of the popularity of computer-
generated 3D animation are examples of persons who are suffering
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
5) Which of the following is an example of a worker experiencing cyclical unemployment?

A) A worker that changes jobs to move closer her family.
B) An assembly line worker who loses his job because of automation.
C) A freightliner employee that got laid off because of the recession of 2007-2009.
D) A lifeguard who was hired during the summer season is laid off after summer is over.
E) A worker quits his job because he does not get along with his boss.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
6) Jack just told his boss that he thinks his boss is an idiot. It is likely that Jack will be
experiencing ________ unemployment in the near future.
A) permanent
B) cyclical
C) frictional
D) structural
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
16
7) Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah
experiencing?
A) cyclical
B) structural
C) frictional
D) Sarah is not experiencing unemployment of any kind because she is not currently part of the
labor force.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
8) Emma is a road construction worker. During the winter months, emmy finds it more difficult
to get work. The unemployment Emma experiences in the winter is
A) structural.
B) cyclical.
C) seasonal.
D) functional.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
9) Which of the following is an example of a worker experiencing frictional unemployment?

A) A worker quits his job at the Post Office to find more interesting work.
B) A computer programmer loses her job because it is outsourced to India.
C) An employee is laid off because the economy is suffering a recession.
D) A United Airlines pilot loses her job because of lack of demand for air travel.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
17
10) An example of a seasonally unemployed worker would be
A) a software engineer who is laid off because of declining demand for the software he writes.
B) a day care provider who quits his job to go back to school.
C) a General Motors employee loses her job because the company is downsizing its work force.
D) a ski lift operator who loses his job when the snow melts in the spring.
E) a mother who quits her job to stay home with her children.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
11) What are the three main kinds of unemployment?

A) frictional, seasonal, and cyclical
B) temporary, permanent, and volunteer
C) cyclical, structural, and temporary
D) structural, frictional, and cyclical
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 648-649/244-245
12) When the labor market is at full employment

A) there is only cyclical unemployment in the economy.
B) there is only structural unemployment in the economy.
C) the unemployment rate is 0%.
D) there is no cyclical unemployment in the economy.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
Topic: Full Employment
18
13) When an economy is at its natural rate of unemployment, which of the following will be
true?
A) The unemployment rate will be 0%.
B) The labor force participation rate will be 100%.
C) The unemployment rate will be greater than 0%.
D) Only structural unemployment as a result of technological change will exist in the economy.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
14) The natural rate of unemployment is made up of

A) frictional, cyclical, and structural unemployment.
B) frictional and cyclical unemployment.
C) cyclical and structural unemployment.
D) frictional and structural unemployment.
E) seasonal and structural unemployment.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 649-650/245-246
15) An increase in cyclical unemployment will result in

A) an increase in the natural rate of unemployment.
B) an increase in the unemployment rate.
C) an increase in structural unemployment.
D) a decrease in frictional unemployment.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
19
16) We say that the economy is at full employment if the unemployment rate is equal to
A) zero.
B) the natural rate of unemployment.
C) the amount of cyclical unemployment.
D) the sum of frictional and cyclical unemployment.
E) the sum of structural and cyclical unemployment.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
17) In March 2009, the Seattle Post-Intelligencer newspaper converted to an online-only format.
In making this transition, it laid off 145 of its 165 employees. The laid-off employees who were
able to find jobs at the rival newspaper, the Seattle Times, after a relatively brief job search
would have been considered
A) structurally unemployed.
B) frictionally unemployed.
C) seasonally unemployed.
D) cyclically unemployed.
Answer: B
Special Feature: Making the Connection: How Should We Categorize the Unemployment at the
Seattle Post-Intelligencer and Other Newspapers?
18) The natural rate of unemployment consists of frictional unemployment plus cyclical
unemployment.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 648-649/244-245
20
19) Eliminating structural unemployment would be good for the economy.
Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
20) The full-employment rate of unemployment is zero.

Answer: FALSE
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
21) Describe the three types of unemployment.

Answer: Frictional unemployment is short-term unemployment that arises from the process of
matching workers with jobs. Structural unemployment arises from a persistent mismatch
between the skills and attributes of workers and the requirements of jobs. Cyclical
unemployment is caused by a business cycle recession.
Comment: Recurring
Diff: 2 Page Ref: 648-649/244-245
22) Explain what economists mean by full employment and why this rate of unemployment is
not zero.
Answer: Full employment occurs in the macro economy when cyclical unemployment is zero.
The full-employment rate of unemployment is then made up of the frictional rate of
unemployment and the structural rate of unemployment. Because it will always take time to find
a job, frictional unemployment will never be zero. Also because demand and technology are
constantly changing in an economy, structural unemployment will never be zero. That is, some
workers will always lose their jobs as the demands for the products they make fall or disappear
entirely.
Comment: Recurring
Diff: 2 Page Ref: 649-650/245-246
21
23) What is the natural rate of unemployment, and what types of unemployment constitute the
natural rate of unemployment?
Answer: The natural rate of unemployment is the rate of unemployment that exists in the
economy when cyclical unemployment is zero. This underlying level of unemployment in the
economy consists of frictional and structural unemployment. The natural rate of unemployment
is also known as the full-employment rate of unemployment.
Comment: Recurring
Diff: 1 Page Ref: 649-650/245-246
8.3 Explaining Unemployment
1) The U.S. unemployment insurance program

A) increases the amount of time the unemployed spend searching for a job.
B) decreases the level of frictional unemployment.
C) pays the unemployed a benefit equal to twice the average wage.
D) eliminates structural unemployment.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
Objective: LO3: Explain what factors determine the unemployment rate.
2) By offering training to workers whose firms laid them off because of competition from
foreign firms, the federal government is attempting to reduce
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 651-652/247-248
22
3) Establishing a state employment agency that speeds up the process of matching unemployed
workers with unfilled jobs is an attempt to lower
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 651-652/247-248
4) Which of the following explains why many European countries have unemployment rates that
are higher than in the United States?
A) Technological change occurs at a faster rate in Europe, so structural unemployment is higher
in Europe.
B) European countries offer higher unemployment benefits than the United States.
C) Firms in European countries offer employees higher wages and higher benefits than do firms
in the United States.
D) The minimum wage in Europe is lower than it is in the United States.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
5) The average unemployment rate from 1999 to 2008 was the lowest for which of the following
countries?
A) Spain
B) Italy
C) France
D) Germany
E) the United States
Answer: E
Comment: Recurring
Diff: 1 Page Ref: 651-652/247-248
23
6) Workers in Canada are eligible for unemployment benefits for about twice as long a period of
time as workers in the United States. As a result,
A) the average duration of unemployment is longer in the United States than in Canada.
B) the unemployment rate in Canada is usually higher than in the United States.
C) the opportunity cost of job search in Canada is lower than in the United States.
D) frictional unemployment is higher, on average, in the United States than in Canada.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
AACSB: Multicultural and Diversity
7) Which of the following has a tendency to raise the unemployment rate?

A) implementing a minimum wage in an economy
B) reducing unemployment insurance in an economy
C) offering wages at the market-clearing rate
D) reducing labor unions membership in an economy
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 651-652/247-248
8) An efficiency wage
A) is higher than the market wage and tends to increase productivity.
B) is lower than the market wage and tends to increase productivity.
C) is higher than the market wage and tends to decrease productivity.
D) is lower than the market wage and tends to decrease productivity.
Answer: A
Comment: Recurring
Topic: Efficiency Wages
24
9) Costco pays its employees higher wages, on average, than Wal-Mart pays its employees.
Which of the following best explains that difference?
A) Wal-Mart sells products that cater to a higher-income customer base than Costco does.
B) Wal-Mart employees receive higher benefits than Costco employees, so they don't have to
receive as much in wages.
C) Higher wages increase the productivity of Costco workers and reduce turnover, thereby
potentially increasing profit.
D) Costco employees work longer hours, on average, than Wal-Mart employees.
Answer: C
Diff: 3 Page Ref: 653-654/249-250
Special Feature: Making the Connection: Why Does Costco Pay Its Workers So Much More
Than Wal-Mart Does?
10) Why might firms pay wages that are above the equilibrium wage in a market?
A) to increase the productivity of their workers
B) to reduce the unemployment rate
C) to encourage workers to form labor unions
D) to reduce profit
Answer: A
Comment: Recurring
11) The equilibrium wage in a local labor market is $6 per hour. If a minimum wage of $8 per
hour is imposed, which of the following will occur?
A) There will be an increase in unemployment.
B) There will be an increase in the quantity of labor demanded by firms.
C) There will be a decrease in the quantity of labor supplied by households.
D) All of the above will occur.
Answer: A
Comment: Recurring
Diff: 3 Page Ref: 651-652/247-248
25
Figure 8-1
12) Refer to Figure 8-1. Based on the graph of the labor market above, if a minimum wage of $8
per hour is imposed, which of the following will result?
A) The quantity of labor demanded by firms will rise.
B) The quantity of labor demanded by firms will fall.
C) The unemployment rate will fall.
D) Both A and C will occur.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
Skill: Graphing
13) Refer to Figure 8-1. Based on the graph of the labor market above, if a minimum wage is set
at $5 per hour, which of the following will occur?
A) The unemployment rate will rise.
B) The unemployment rate will fall.
C) The level of unemployment will rise, but the percentage of the labor force unemployed will
not change.
D) None of the above will occur.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
Skill: Graphing
26
14) Labor unions cause unemployment because the union contract wage is set
A) below the market wage, causing a shortage of labor.
B) below the market wage, causing a surplus of labor.
C) above the market wage, causing a surplus of labor.
D) above the market wage, causing a shortage of labor.
Answer: C
Comment: Recurring
Topic: Labor Unions
15) The unemployment rate tends to be higher in the European Union as compared to the United
States.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 651-652/247-248
16) The unemployment rate is higher with a minimum wage law than it would be without a
minimum wage law.
Answer: TRUE
Comment: Recurring
17) Paying efficiency wages are a way for a company to cut costs and become more efficient,
and are therefore lower than market wages.
Answer: FALSE
Comment: Recurring
27
18) What effect does the payment of government unemployment insurance have on the
unemployment rate?
Answer: The payment of government unemployment insurance likely raises the unemployment
rate. The unemployment insurance payments lower the opportunity cost (the salary that the
unemployed are giving up by not working) of continuing to search for a job, which leads the
unemployed to spend more time searching for a job.
Comment: Recurring
Diff: 2 Page Ref: 651-652/247-248
19) Why would a firm pay efficiency wages?

Answer: An efficiency wage is a wage that is higher than the market wage. Firms pay efficiency
wages to raise productivity. Studies show that workers are motivated to work harder if they are
paid higher wages. Put differently, a firm does not monitor workers as closely in order to get
them to be more productive. The higher wage motivates them to be productive.
Comment: Recurring
8.4 Measuring Inflation
1) The broadest measure of the price level that includes all final goods and services is
A) the producer price index .
B) the consumer price index.
C) the GDP deflator.
D) the wholesale price index.
Answer: C
Comment: Recurring
Topic: Price Indexes
Objective: LO4: Define price level and inflation rate and understand how they are computed.
28
2) The most widely used measure of inflation is based on which of the following price indices?
A) the producer price index
B) the consumer price index
C) the GDP deflator
D) the wholesale price index
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
Topic: Consumer Price Index
3) The CPI is also referred to as

A) the GDP deflator.
B) the inflation-consumption index.
C) the cost-of-living index.
D) the producer price index.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
4) Which of the following is the smallest portion of the market basket of goods that makes up the
CPI?
A) housing
B) food and beverages
C) transportation
D) apparel
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
29
Table 8-1
CPI
Year
(1982-1984 = 100)
2008 175
2009 180
5) Refer to Table 8-1. Suppose that the data in the table above reflect price levels in the
economy. What is the inflation rate between 2008 and 2009?
A) 2.9%
B) 3.5%
C) 4.6%
D) 5%
E) 7.5%
Answer: A
Topic: Inflation Rate
Special Feature: Don't Let This Happen to YOU!: Don't Miscalculate the Inflation Rate
Table 8-2
CPI
Year
(1982-1984 =100)
2008 100
2009 120
6) Refer to Table 8-2. Suppose that the data in the table above reflect the price levels in the
economy. What is the inflation rate in between 2008 and 2009?
A) 2%
B) 5%
C) 10%
D) 12%
E) 20%
Answer: E
30
Table 8-3
CPI
Year
(1982-1984 =100)
2008 100
2009 113
7) Refer to Table 8-3. Suppose that the data in the table above reflect the price levels in the
economy. Given that data, we can say that the cost of living rose by ________ between 2008 and
2009?
A) 2%
B) 5%
C) 8%
D) 11%
E) 13%
Answer: E
8) Monthly expenditures for a family of 4 in 2008 averaged $1,400. In 2009, the cost of the same
purchases was $1,500. If 2008 is the base year, what was the CPI in 2009?
A) 110
B) 107
C) 100
D) 93
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 655-656/251-252
31
9) If the CPI changes from 125 to 120 between 2008 and 2009, how did prices change between
2008 and 2009?
A) Prices increased by 5%.
B) Prices decreased by 5%
C) Prices increased by 25%.
D) Prices decreased by 4%.
Answer: D
Comment: Recurring
Diff: 3 Page Ref: 655-656/251-252
10) Which of the following describes the accuracy of the Consumer Price Index?
A) Changes in the CPI accurately reflect the true rate of inflation.
B) Changes in the CPI understate the true rate of inflation.
C) Changes in the CPI overstate the true rate of inflation.
D) Changes in the CPI are unrelated to the true rate of inflation.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 656-657/252-253
Topic: Is the CPI Accurate?
11) If the CPI rises from 206.7 to 212.7 between two consecutive years, by how much has the
cost of living changed between these two years?
A) The cost of living has increased by 6%.
B) The cost of living has increased by 2.9%.
C) The cost of living has increased by 12.7%.
D) The cost of living has decreased by 6%.
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 655-656/251-252
32
12) If consumers purchase fewer of those products that increase most in price and more of those
products that decrease in price as compared to the CPI basket, then
A) changes in the CPI accurately reflect the true rate of inflation.
B) changes in the CPI understate the true rate of inflation.
C) changes in the CPI overstate the true rate of inflation.
D) changes in the CPI are unrelated to the true rate of inflation.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 656-657/252-253
13) Most economists believe that biases cause changes in the CPI to overstate the inflation rate
by
A) 0.1%.
B) 0.2%.
C) 0.4%.
D) 0.5%.
E) 0.9%.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 656-657/252-253
14) The formula for calculating the CPI is

A) (Expenditures in the current year/Expenditures in the base year) × 100.
B) (Expenditures in the current year × Expenditures in the base year)/100.
C) (Expenditures in the base year/Expenditures in the current year).
D) (Expenditures in the base year × 100)/(Expenditures in the current year).
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
33
15) When the price of gasoline rises, some consumers begin riding their bikes more frequently or
riding the bus instead of driving their cars. The fact that the CPI does not fully account for such
changes in consumer behavior is called
A) outlet bias.
B) increase in quality bias.
C) substitution bias.
D) discrimination bias.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 656-657/252-253
16) The base period for CPI calculations is generally 1982-84. In 2005, 50% of households
accessed the Internet through a broadband connection that would not have existed in the 1980s.
This potential for bias in the CPI is referred to as ________ bias and results in ________.
A) outlet bias; the CPI underestimating the true change in the cost of living
B) new product; the CPI overestimating the true change in the cost of living
C) outlet bias; the CPI overestimating the true change in the cost of living
D) net product; the CPI underestimating the true change in the cost of living
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 656-657/252-253
17) What is outlet bias?

A) the tendency for households to spend more money over time
B) the tendency for households to spend their money at discount stores as prices rise
C) the tendency for the quality of products to improve over time even though the CPI does not
measure changes in quality
D) the tendency for consumers to purchase newer, more technologically advanced products even
though they have higher prices
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 656-657/252-253
34
18) In 1986, an Apple IIe computer with 65 kilobytes of memory cost around $1,500. Today, a
$1,500 iMac computer (also made by Apple) comes with 4 gigabytes of memory. This illustrates
the potential for what kind of bias in CPI calculations?
A) new product bias
B) increase in quality bias
C) substitution bias
D) outlet bias
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 656-657/252-253
Table 8-4
Expenditure
(on base year
Quantity Expenditure Price quantities)
Product (2004) Price (2004) (2004) (2009) (2009)
Computers 1 $1,200 $1,200 $900 $900
Books 10 25 250 30 300
Burgers 50 3 150 4 200
Total $1,600 $1,400
19) Refer to Table 8-4. Suppose an economy has only three goods and the typical family
purchases the amounts given in the table above. If 2004 is the base year, then what is the CPI for
2009?
A) 14.3
B) 87.5
C) 114.3
D) 160
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 655-656/251-252
35
Table 8-5
Expenditure
(on base year
Quantity Price Expenditure Price quantities)
Product (2000) (2000) (2000) (2008) (2008)
Hair cuts 6 $50 $300 $70 $420
Backpacks 4 25 100 30 120
Tacos 100 1 100 5 500
Total $500 $1,040
20) Refer to Table 8-5. Suppose an economy has only three goods and the typical family
purchases the amounts given in the table above. If 2000 is the base year, then what is the CPI for
2008?
A) 40.08
B) 100
C) 180
D) 208
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 655-656/251-252
21) The PPI is the

A) price parity index.
B) prime producer index.
C) producer price index.
D) production performance indicator.
Answer: C
Comment: Recurring
Topic: Producer Price Index
36
22) What does the PPI measure?
A) the average change in the prices paid for all goods produced in the economy over a given year
B) the average of the prices received by producers of goods and services at all stages of the
production process
C) the level of production of goods and services generated in the economy in a given year
D) the difference between the prices consumers pay for goods and services and the prices
producers pay for goods and services
Answer: B
Comment: Recurring
23) The inflation rate measures the percentage increase in the price level from one year to the
next.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
Objective: LO4: Define the price level and the inflation rate and understand how they are
computed.
24) If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell
by 2% between those two years.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 655-656/251-252
25) The producer price index tracks the prices firms receive for goods and services at all stages
of production.
Answer: TRUE
Comment: Recurring
computed.
37
26) List three different price indices and explain how they differ in terms of the market basket on
which they are based.
Answer: Three examples of price indices are the GDP deflator, the consumer price index, and
the producer price index. All three differ by the kinds of goods that are contained in the market
basket that is used to calculate the average level of prices. The GDP deflator is based on the
average price of all final goods and services produced. The consumer price index is based on the
average price of 211 goods/services purchased by the typical urban family of four. The producer
price index is based on the prices received by producers of goods and services at all stages of the
production process.
Comment: Recurring
Diff: 2 Page Ref: 654-657/250-253
Topic: Price Indexes
27) Explain how the CPI is constructed.

Answer: The Bureau of Labor statistics surveys 30,000 households to determine their spending
habits and to construct a listing or market basket of these goods. The survey is also used to
determine the importance of the items in the consumer's budget. Each month the BLS collects
the prices of the goods in the market basket from 23,000 stores. A weighted average is taken of
those prices, with the more important items receiving higher weights. A base year is chosen and
the CPI is set to 100 in the base year. In every other year, the CPI is calculated as the ratio of the
cost of the market basket in that year, divided by the cost of the market basket in the base year,
times 100.
Comment: Recurring
Diff: 2 Page Ref: 655-656/251-252
38
Table 8-6
Base Year
Product Quantity Price (2001) Price (2009) Price (2010)
Burritos 10 $1.00 $1.50 $1.75
Flashlights 15 5.00 7.00 6.75
Golf balls 8 2.00 3.00 3.50
28) Refer to Table 8-6. Consider a simple economy that produces only three products: burritos,
flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2010,
as measured by the consumer price index.
Answer: Total expenditures for 2001 = (10 × $1.00) + (15 × $5.00) + (8 × $2.00) = $101.00.
Total expenditures for 2009 = (10 × $1.50) + (15 × $7.00) + (8 × $3.00) = $144.00.
Total expenditures for 2010 = (10 × $1.75) + (15 × $6.75) + (8 × $3.50) = $146.75.
The CPI for 2009 = [($144.00/$101.00) × 100] = 142.57

The CPI for 2010 = [($146.75/$101.00) × 100] = 145.30.
So, the inflation rate for 2010 = [((145.30 − 142.57)/142.57) × 100)] =1.9%.
Comment: Recurring
Diff: 3 Page Ref: 655-656/251-252
computed.
8.5 Using Price Indexes to Adjust for the Effects of Inflation
1) The CPI in 1990 was 131, and the CPI in 2008 was 215. If you earned a salary of $40,000 in
1990, what would be a salary with equivalent purchasing power in 2008?
A) $52,400
B) $65,649
C) $86,000
D) $105,649
Answer: B
Comment: Recurring
Topic: Adjusting for Inflation
Objective: LO5: Use price indexes to adjust for the effects of inflation.
39
2) If your nominal wage rises more slowly than the price level, we can say your real wage has
________ and the purchasing power of a dollar has ________.
A) fallen; fallen
B) fallen; risen
C) risen; risen
D) risen; fallen
Answer: A
Comment: Recurring
Table 8-7
Nominal Average CPI

Year
Hourly Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 110
3) Refer to Table 8-7. Looking at the table above, real wages ________ from 2007 to 2008, and
real wages ________ from 2008 to 2009.
A) rose; rose
B) rose; fell
C) fell; rose
D) fell; fell
Answer: C
Diff: 2 Page Ref: 658-659/254-255
Special Feature: Solved Problem: Calculating Real Average Hourly Earnings
40
Table 8-8
Nominal Average CPI

Year
Hourly Earnings (1982-1984 =100)
2004 $10 188.9
2005 11 195.3
2006 13 201.6
4) Refer to Table 8-8. Looking at the table above, real average hourly earnings in 2005 were
A) $3.67.
B) $5.63.
C) $10.24.
D) $11.37.
Answer: B
Diff: 2 Page Ref: 658-659/254-255
5) Refer to Table 8-8. Looking at the table above, real average hourly earnings between 2005
and 2006 changed by
A) 1.2%.
B) 4.5%.
C) 9.9%.
D) 14.5%.
Answer: D
Diff: 3 Page Ref: 658-659/254-255
6) Between 2008 and 2009, the CPI of a small nation rose from 182 to 185. If household incomes
rose by 3% during that period of time, which of the following is true?
A) The purchasing power of household income rose between 2008 and 2009.
B) The purchasing power of household income fell between 2008 and 2009.
C) The purchasing power of household income remained constant between 2008 and 2009.
D) The CPI cannot be used to determine how the purchasing power of household income
changes over time.
Answer: A
Comment: Recurring
41
Table 8-9
Nominal Average Hourly CPI

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 117
7) Refer to Table 8-9. Looking at the table above, what is the rate of growth of real average
hourly earnings from 2008 to 2009?
A) 7.7%
B) 6.25%
C) 4%
D) -4%
Answer: A
Diff: 3 Page Ref: 658-659/254-255
Table 8-10

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 10 105
2009 12 110
8) Refer to Table 8-10. Looking at the table above, what is the approximate rate of growth of
real average hourly earnings from 2007 to 2008?
A) 15%
B) 4.4%
C) -1.5%
D) -4.8%
Answer: D
Comment: Recurring
42
9) Refer to Table 8-10. Looking at the table above, what is the rate of growth of the average
price level from 2007 to 2008?
A) 1%
B) 2%
C) 3%
D) 4%
E) 5%
Answer: E
Comment: Recurring
10) Refer to Table 8-10. Looking at the table above, what is the rate of growth of the average
price level from 2008 to 2009?
A) 1%
B) 2%
C) 3.5%
D) 4.76%
E) 5.25%
Answer: D
Comment: Recurring
11) To obtain real average hourly earnings, nominal average hourly earnings are multiplied by
the CPI.
Answer: FALSE
43
12) The CPI in 2008 was 217, while the CPI in 1980 was 82. If you had $5,000 in 1980, its
equivalent purchasing power in 2008 would be $10,850.
Answer: FALSE
Comment: Recurring
Table 8-11

Year
Earnings (1982-1984 =100)
2007 $10 100
2008 11 105
2009 12 110
13) Refer to Table 8-11. Using the above table, calculate real average hourly earnings for 2007,
2008, and 2009. Calculate the rate of growth of real average hourly earnings from 2008 to 2009.
 $10 
Answer: Real average hourly earnings in 2007 are   × 100 = $10.
 100 
 $11
Real average hourly earnings in 2008 are   × 100 = $10.48
105 
 $12 
Real average hourly earnings in 2009 are   × 100 = $10.91.
 110 
The rate of growth of real average hourly earnings from 2008 to 2009 is
 $10.91 − $10.48 
  × 100 = 4.103%.
 $10.48 
Comment: Recurring
44
Table 8-12
Nominal
CPI
Year Minimum
(1982-1984 =100)
Wage
1974 $2.00 49.3
2008 6.55 215.3
14) Refer to Table 8-12. The table above lists the actual minimum wage and CPI in 1974 and in
2008. Using the above table, calculate the real minimum wage for 1974 and 2008. Calculate the
rate of growth of the real minimum wage from 1974 to 2008. Are workers better off in terms of
the purchasing power of a dollar in 1974 or 2008? Explain why.
 $2 
Answer: The real minimum wage in 1974 is   × 100 = $4.06.
 49.3 
 $6.55 
The real minimum wage in 2008 is   × 100 = $3.04
 215.3 
 $3.04 − $4.06 
The rate of growth of the real wage from 1974 to 2008 is   × 100 = -25%
 $4.06 
Workers who earned the minimum wage were better off in 1974 as compared to 2008. The value
of the real minimum wage was higher in 1974. It has declined by 25% from 1974 to 2008.
Diff: 3 Page Ref: 658-659/254-255
8.6 Real versus Nominal Interest Rates
1) During a deflationary period,

A) the nominal interest rate is less than the real interest rate.
B) the real interest rate is less than the nominal interest rate.
C) the price level rises.
D) the nominal interest rate does not change.
Answer: A
Comment: Recurring
Diff: 3 Page Ref: 659-661/255-257
Topic: Real versus Nominal Interest Rates
Objective: LO6: Distinguish between the nominal interest rate and the real interest rate.
45
2) The real rate of interest is
A) the nominal interest rate plus the inflation rate.
B) the nominal interest rate minus the inflation rate.
C) the interest rate determined by the supply and demand in the money market.
D) the nominal interest rate.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 659-661/255-257
3) If the nominal interest rate is 6% and the inflation rate is 9%, then the real interest rate is
A) -3%.
B) 3%.
C) 6.67%.
D) 15%.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
4) If you want to earn a real interest rate of 3% on money you lend, and you expect that inflation
will be 2%, what nominal rate of interest will you charge?
A) 1%
B) 5%
C) 6%
D) 9%
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
46
5) If the nominal interest rate is 6% and the inflation rate is 2% then the real interest rate is
A) 8%.
B) 4%.
C) 3%.
D) 2%.
E) 1%.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
6) Deflation occurs when

A) there is a sustained increase in the price level.
B) there is a one-time increase in the price level.
C) there is a decline in the price level.
D) there is a decrease in the expected rate of inflation.
Answer: C
Comment: Recurring
Topic: Deflation
7) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. The CPI over that
year rises from 180 to 190. What is the real rate of interest you will earn?
A) 0%
B) 4.4%
C) 5.5%
D) 5.8%
Answer: B
Comment: Recurring
Diff: 3 Page Ref: 659-661/255-257
47
8) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. If inflation
over the year is 2%, what is the real interest rate you are paying?
A) 2%
B) 2.5%
C) 3%
D) 5%
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
9) You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over
that year rises from 180 to 200. What is the real interest rate you are paying?
A) 15%
B) 5%
C) -1.1%
D) -6.1%
Answer: D
Comment: Recurring
Diff: 3 Page Ref: 659-661/255-257
10) The nominal interest rate will be less than the real interest rate when
A) the rate of inflation is positive but decreasing.
B) the rate of inflation is positive and increasing.
C) the rate of inflation is negative.
D) the real interest rate is negative.
Answer: C
Comment: Recurring
Diff: 3 Page Ref: 659-661/255-257
48
11) You agree to lend $1,000 for one year at a nominal interest rate of 10%. You anticipate that
inflation will be 4% over that year. If inflation is instead 3% over that year, which of the
following is true?
A) The real interest rate you earn on your money is lower than you expected.
B) The purchasing power of the money that will be repaid to you will be lower than you
expected.
C) The person who borrowed the $1,000 will be worse off as a result of the unanticipated
decrease in inflation.
D) The real interest rate you earn on your money will be negative.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
12) The nominal interest rate minus the inflation rate equals the real interest rate.
Answer: TRUE
Comment: Recurring
13) If inflation is higher than expected, this helps borrowers (by reducing the real interest rate
they pay) and hurts lenders (by reducing the real interest rate they receive).
Answer: TRUE
Comment: Recurring
Diff: 2 Page Ref: 659-661/255-257
14) What is the difference between the nominal interest rate and the real interest rate?
Answer: The nominal interest rate is the stated interest rate on a loan, while the real interest rate
is the nominal interest rate minus the inflation rate.
Comment: Recurring
49
15) Suppose you obtain a fixed rate mortgage during a period of relatively high inflation. During
the next ten years, inflation falls. Are you a winner or a loser due to inflation? Explain why.
Answer: You would be a loser under this scenario. Your mortgage rate is the sum of the real rate
of interest plus the amount of inflation that was expected over the life of the mortgage. When
inflation is high, people's expectations of future inflation are high. In those circumstances, your
fixed mortgage rate contains a high expected-inflation premium. Therefore, as inflation falls, the
real rate of interest on your mortgage increases.
Comment: Recurring
Diff: 3 Page Ref: 659-661/255-257
8.7 Does Inflation Impose Costs on an Economy?
1) Which of the following individuals would be most negatively affected by anticipated

inflation?
A) a retired railroad engineer who receives a fixed income payment every month
B) a union contractor whose pay is adjusted based on changes in the CPI
C) a full-time employee at a pizza parlor who makes more than the minimum wage
D) a student who borrows $10,000 at a nominal interest rate of 5% to finance educational
expenses
Answer: A
Comment: Recurring
Topic: Anticipated Inflation
Objective: LO7: Discuss the problems that inflation causes.
2) If inflation is completely anticipated,

A) no one loses in the economy.
B) borrowers lose in the economy.
C) lenders lose in the economy.
D) firms lose because they incur menu costs.
Answer: D
Comment: Recurring
50
3) If inflation increases unexpectedly, then
A) borrowers pay a higher real interest rate than they expected.
B) lenders receive a lower real interest rate than they expected.
C) lenders gain and borrowers gain.
D) neither borrowers nor lenders lose.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 662-663/258-259
Topic: Unanticipated Inflation
4) Which of the following do not suffer the costs of inflation?

A) persons on fixed incomes
B) persons whose incomes rise more rapidly than inflation
C) firms that have to devote more time and labor to raising prices
D) an investor that has to pay higher taxes because of the inflation
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 661-662/257-258
Topic: Inflation and the Distribution of Income
5) Inflation that is ________ than what is expected benefits ________ and hurts ________.
A) less; lenders; borrowers
B) less; borrowers; lenders
C) greater; lenders; borrowers
D) greater; lenders; no one
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 661-662/257-258
51
6) The costs to firms of changing prices are called
A) redistribution costs.
B) menu costs.
C) anticipation costs.
D) money illusion costs.
Answer: B
Comment: Recurring
7) What are menu costs?

A) the full list of a firm's costs of production
B) the costs to a firm of changing prices
C) the cost to a household of borrowing money when there is deflation
D) the opportunity cost of dining in a restaurant instead of at home
Answer: B
Comment: Recurring
8) Which of the following is not a cost posed by inflation?

A) Inflation reduces the affordability of goods and services to the average consumer.
B) The money that consumers and firms hold loses its purchasing power.
C) Firms must pay for changing prices on products and printing new catalogs.
D) Banks can lose if they under predict inflation and charge an interest rate that does not
completely compensate for inflation.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 661-662/257-258
52
9) The deflation of the 1930s impacted the U.S. economy because it led some consumers to
________ and because it ________.
A) postpone purchases while they waited for prices to fall even lower; increased the burden on
borrowers.
B) demand higher wages in anticipation of prices eventually rising again; increased
manufacturing since firms could afford to hire more labor.
C) borrow more money since money was now cheap; reduced the amount of money consumers
would have to pay back on their outstanding loans.
D) increase purchases to take advantage of the falling prices; increased the burden on lenders.
Answer: A
Diff: 2 Page Ref: 663-664/259-260
Topic: Deflation
Special Feature: Making the Connection: What's So Bad about Falling Prices?
10) The recession of 2007-2009 had different effects on various sectors of the economy. In April
2009, the overall unemployment rate in the United States was 8.6 percent. Which of the
following sectors of the U.S. economy had a much lower unemployment rate than 8.6 percent in
April 2009?
A) education and health services
B) leisure and hospitality
C) construction
D) manufacturing
Answer: A
Special Feature: An Inside LOOK: Newspaper Layoffs Add to Rising Unemployment in 2009
11) The problem with inflation is that as prices rise, consumers can no longer afford to buy as
many goods and services.
Answer: FALSE
Comment: Recurring
Diff: 1 Page Ref: 661-662/257-258
53
12) Inflation redistributes income to a greater extent when the inflation is unanticipated
compared to when the inflation is anticipated.
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 661-662/257-258
13) There are no costs to inflation if it is fully anticipated.

Answer: FALSE
Comment: Recurring
14) Explain why you would rather be a borrower during a period of unexpected rising inflation,
and a lender during a period of unexpected declining inflation.
Answer: The nominal interest rate includes a charge to compensate the lender for the loss in the
purchasing power due to inflation. If inflation unexpectedly rises, the lender does not get
compensated enough for the loss in purchasing power. Likewise the borrower pays too little to
compensate the lender for inflation. So it is better to be a borrower in times of unexpected rising
inflation.
When inflation unexpectedly falls, then the lender gets compensated too much for inflation. The
borrower likewise pays too much for inflation. So it is better to be a lender rather than a
borrower during a period of unexpected declining inflation.
Comment: Recurring
Diff: 3 Page Ref: 662-663/258-259
54
15) Describe how a lender can lose during inflation if the inflation is unanticipated and the loan
is a fixed-interest-rate loan. How would a variable-interest-rate loan (one that adjusts over the
contract period) eliminate these loses?
Answer: Lenders require compensation for inflation when charging interest. The nominal
interest rate (also called the market interest rate) they charge equals the real rate of interest plus
the expected inflation over the loan contract period. The interest rate they charge is determined at
the beginning of the loan period, so the charge for inflation is a prediction of what the lender
thinks inflation will be over the contract period. If the loan has a fixed rate, the interest rate does
not change over the period of the loan. If the lender under-predicts inflation, then the lender will
not be compensated enough for the loss in purchasing power due to inflation. The lender will
lose to the extent of the under-prediction.
If the loan is a variable-rate loan, the interest rate can be adjusted upwards if the lender under-
predicts inflation. This can lower the loss to the lender. The variable rate automatically adjusts
for mistakes in predicting inflation. The more frequently the rate can be adjusted, the less the
lender's losses.
Comment: Recurring
Diff: 3 Page Ref: 662-663/258-259
55

Macroeconomics 3rd Edition Hubbard Test Bank

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Macroeconomics 3rd Edition Hubbard Test Bank

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Macroeconomics 3rd Edition Hubbard

1) The labor force is the sum of

4) The unemployment rate is

5) A full-time student who is not working is categorized as

7) Discouraged workers are

8) The labor force participation rate is defined as

14) The U.S. unemployment rate is highest for

Diff: 2 Page Ref: 641/237

The labor force participation rate is calculated as:

3) Workers laid off as a result of a recession suffer

5) Which of the following is an example of a worker experiencing cyclical unemployment?

9) Which of the following is an example of a worker experiencing frictional unemployment?

11) What are the three main kinds of unemployment?

12) When the labor market is at full employment

14) The natural rate of unemployment is made up of

15) An increase in cyclical unemployment will result in

20) The full-employment rate of unemployment is zero.

21) Describe the three types of unemployment.

8.3 Explaining Unemployment

1) The U.S. unemployment insurance program

7) Which of the following has a tendency to raise the unemployment rate?

19) Why would a firm pay efficiency wages?

8.4 Measuring Inflation

3) The CPI is also referred to as

14) The formula for calculating the CPI is

17) What is outlet bias?

21) The PPI is the

27) Explain how the CPI is constructed.

The CPI for 2009 = [($144.00/$101.00) × 100] = 142.57

8.5 Using Price Indexes to Adjust for the Effects of Inflation

Nominal Average CPI

Nominal Average CPI

Nominal Average Hourly CPI

Nominal Average Hourly CPI

Nominal Average Hourly CPI

8.6 Real versus Nominal Interest Rates

1) During a deflationary period,

6) Deflation occurs when

8.7 Does Inflation Impose Costs on an Economy?

1) Which of the following individuals would be most negatively affected by anticipated

2) If inflation is completely anticipated,

4) Which of the following do not suffer the costs of inflation?

7) What are menu costs?

8) Which of the following is not a cost posed by inflation?

13) There are no costs to inflation if it is fully anticipated.

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