Econ Macro4 4th Edition Mceachern Test Bank

ECON MACRO4 4th Edition McEachern
Test Bank
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Name: Class: Date:
Chapter 07—Unemployment and Inflation

1. A major cost of unemployment is lost production.
a. True
b. False
ANSWER: a
2. Discouraged workers are included in the labor force figures but not in unemployment figures.
a. True
b. False
ANSWER: b
3. Which of the following is not a cost of unemployment?

a. Unemployed individuals suffer a loss of income.
b. Unemployed individuals are more likely to have emotional or psychological problems.
c. Unemployed individuals can lose their job skills over time.
d. Unemployment causes production to decrease from what it could be.
e. The opportunity cost of unemployment is a higher inflation rate.
ANSWER: e
4. Which of the following is not considered a cost of unemployment?

a. loss of self-respect by those who are unemployed
b. waste of the economy's resources
c. negative psychological effects on those who have lost their jobs
d. higher inflation rates
e. loss of income by those who are unemployed
ANSWER: d
5. Measured unemployment includes discouraged workers.

a. True
b. False
ANSWER: b
6. The unemployment rate rises any time there is an increase in the number of unemployed.
a. True
b. False
ANSWER: b
7. The labor force consists of all adults who are currently employed.
a. True
b. False
ANSWER: b
8. Inmates from the county prison who are on work release are counted as part of the labor force.
a. True
b. False
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Name: Class: Date:

ANSWER: b
9. The labor force consists of all

a. the people in the economy who are not retired
b. 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 noninstitutionalized population over 16 in the economy who hold jobs or are looking for them
e. the citizens in the economy who are graduates of high school
ANSWER: d
10. 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 now a househusband
d. Steffan, who thinks he could easily earn $100,000 per year, despite the opinion of the psychiatrist at the state
hospital where he is a patient
e. Monique, age 90, who is enjoying her retirement in Montana
ANSWER: b
11. 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 willing to accept a reasonable offer
d. are between 16 and 65 years of age
e. are willing to accept any offer of employment
ANSWER: b
12. The unemployment rate is the

a. percentage of people in the economy who do not hold jobs
b. percentage of the labor force that does not have a job
c. number of people in the economy who have given up looking for employment
d. number of people in the labor force without jobs
e. ratio of unemployed to employed high school graduates in the economy
ANSWER: b
13. 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 people in the labor force is
a. 30
b. 60
c. 85
d. 90
e. 70
ANSWER: e

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14. 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 counted as unemployed is
a. 10
b. 15
c. 40
d. 30
e. 90
ANSWER: a
15. The unemployment rate will increase whenever there is a(n)

a. increase in the number of persons classified as unemployed
b. increase in the number of unemployed relative to the size of the labor force
c. increase in the size of the U.S. population and there is no change in the number of persons classified as
employed
d. reduction in the size of the labor force
e. reduction in the size of the labor force while the number of unemployed decreases
ANSWER: b
16. 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
17. Suppose 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. Which expression would equal the unemployment rate?
a. U/(E + NLF)
b. U/E
c. U/(U + E)
d. U/(E + NLF)
e. U/(U + E - NLF)
ANSWER: c
18. Suppose 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. Which expression would equal the labor force participation rate?
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
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19. 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
20. Which of the following are classified as "discouraged workers"?

a. all those between 16 and 65 who are neither disabled nor in an institution and are also neither employed nor
seeking employment
b. labor force members who have chosen early retirement because they dislike their work or think the pay is too
low
c. members of the noninstitutional population who say they want to be employed but are not searching for a job
d. members of the labor force who are looking for a job but cannot find one
e. anyone in the population who is not working
ANSWER: c
21. Which of the following people would be counted as unemployed?

a. a retired naval officer
b. a full-time student in high school
c. a father of preschool children who does not want to work
d. an inner-city teenager who has given up looking for work after a year of trying
e. a downhill ski instructor who looks for work during the summer
ANSWER: e
22. If top government officials claim that "more people are working now than ever before," which of the following must
be 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
23. Which of the following is true about labor force participation?

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 are not fully using 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

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24. Suppose the official unemployment rate is 10 percent. We can conclude without question that
a. the same 10 percent of the people in the economy were out of work for the entire year
b. one of every ten people in the labor force is currently unemployed
c. the same 10 percent of the people in the labor force were out of work for the entire year
d. every person in the labor force was out of work for 10 percent of the year
e. 10 percent of the people in the economy were each out of work for 10 percent of the year
ANSWER: b
25. Which of the following is not a way to become officially unemployed?

a. quit your job to look for a better job in another part of the country
b. be fired from your job
c. look for a job after being out of the labor force for five years
d. retire
e. look for a job only for the period in the summer that you are out of school
ANSWER: d
26. Which of the following people would be counted among the unemployed?
a. a new college graduate selling newspaper advertising part-time while looking for other work
b. a new college graduate selling newspaper advertising full-time while looking for other work
c. a new college graduate selling newspaper advertising part-time and not looking for other work
d. a new college graduate who gets tired of selling newspaper advertising 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
27. 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 gives up looking for a job
d. a person who works at a job that underemploys his or her skills
e. a person who works part-time and would rather work full-time
ANSWER: a
28. 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 relative to the size of the labor force
c. decrease in the size of the population and there is 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 and the population does not change
ANSWER: b
29. 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
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c. been influenced by decreasing real wages since 1960
d. fluctuated substantially both upward and downward since the 1950s
e. increased only very slightly since the 1950s
ANSWER: b
30. Which of the following is true regarding 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; that for men has risen.
c. The rate for men has fallen; that 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
31. The labor force participation rate is the number of people

a. employed divided by the adult population
b. employed divided by the number of people in the labor force
c. in the labor force divided by the adult population
d. unemployed divided by the number of people in the labor force
e. in the labor force divided by the number of people employed
ANSWER: c
32. Since the end of World War II, the U.S. unemployment rate
a. has displayed a downward trend
b. has displayed an upward trend
c. has remained almost constant from year to year
d. was generally higher during the 1970s than during the 1990s
e. has not displayed any clear pattern
ANSWER: b
33. Since World War II, the U.S. economy has experienced
a. a decrease in the civilian labor force
b. a decrease in the number of unemployed persons
c. a decrease in the number of employed persons
d. an increase in the labor force participation rate of women
e. a declining unemployment rate as a general trend
ANSWER: d
34. When workers are over-qualified for their current jobs or can find only part-time work, we say they are
a. unemployed
b. discouraged workers
c. not in the labor force
d. overemployed
e. underemployed

Name: Class: Date:

ANSWER: e
35. The unemployment rate for blacks in the United States is higher than that for whites.
a. True
b. False
ANSWER: a
36. Different demographic groups

a. have identical durations of unemployment
b. have identical unemployment rates
c. are weighted equally in the official unemployment rate
d. have different unemployment rates
e. are weighted more heavily in the official unemployment rate if they have larger unemployment rates
ANSWER: d
37. Which of the following groups tends to have the highest unemployment rate in the United States?
a. black teenagers
b. black men
c. white women
d. black women
e. white teenagers
ANSWER: a
38. Since World War II, labor force participation rates have
a. increased for males and females
b. remained nearly constant for males and increased for females
c. decreased for males and decreased for females
d. increased for males and decreased for females
e. decreased for males and increased for females
ANSWER: e
39. An individual with a Ph.D. in physics, who can find employment only in a pizza parlor, would be considered as
a. a discouraged worker
b. underemployed
c. overemployed
d. unemployed
e. not in the labor force
ANSWER: b
40. A recent college graduate who is still looking for their first job, would be considered as
b. underemployed
c. overemployed
d. unemployed
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e. not in the labor force
ANSWER: d
41. An accountant who lost their job in the last recession who gives up looking for work after 12 months of unsuccessful
job search, would be considered as
b. underemployed
c. not in the labor force
d. unemployed
e. both a and c
ANSWER: e
42. Which of the following groups has historically had the highest unemployment rate?
a. professional workers
b. white teenagers
c. black teenagers
d. black adults
e. white adults
ANSWER: c
43. Since World War II, the average duration of unemployment in the U.S.
a. increased
b. decreased
c. has shown no change
d. decreased until 1972, then increased down to the present
e. decreased until 1984, then increased down to the present
ANSWER: a
44. Government fiscal policies that attempt to stimulate aggregate demand are often aimed at reducing cyclical
unemployment.
a. True
b. False
ANSWER: a
45. A person whose skills do not match the available job openings is considered frictionally unemployed.
a. True
b. False
ANSWER: b
46. Ginger quits her job as a secretary because she cannot handle the stress. It takes her three weeks of solid effort to land
a job as a receptionist. Over these three weeks, she would be considered frictionally unemployed.
a. True
b. False
ANSWER: a

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47. Most of the unemployment during the Great Depression was cyclical unemployment.
a. True
b. False
ANSWER: a
48. Sharon was being treated unfairly by her boss, so she stormed off the job and two weeks later found another position.
For two weeks Sharon experienced
a. cyclical unemployment
b. structural unemployment
c. seasonal unemployment
d. frictional unemployment
e. being out of the labor force
ANSWER: d
49. Juanita earned a B.S. in engineering and went to work for a defense contractor. When the government cut spending,
Juanita and 99 others were laid off. The only other business in the town is growing grapes, but the growers refuse to hire
laid-off engineers, knowing they will leave at the first opportunity. The unemployment Juanita is experiencing is
a. cyclical
b. structural
c. seasonal
d. frictional
e. voluntary
ANSWER: b
50. The only job Justin ever holds is preparing income tax forms at H&R Block from January 2 to April 15. In March,
while he is still working, he sends his resume to prospective employers. In March, he was counted as
a. cyclically unemployed
b. structurally unemployed
c. frictionally unemployed
d. part of the labor force
e. out of the labor force
ANSWER: d
51. Your cousin recently graduated from Harvard Law School and has not found a job after looking for one last week. She
can be described as
a. frictionally unemployed
c. seasonally unemployed
d. not part of the labor force
e. a discouraged worker
ANSWER: a
52. The type of unemployment most likely to be experienced by a touring professional golfer is
a. frictional unemployment

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d. cyclical unemployment
e. discouraged-worker unemployment
ANSWER: c
53. Frictional unemployment refers to unemployment that results from

a. a mismatch of skills
b. being in the wrong geographical location
c. taking the time to find the best job
d. seasonal decreases in demand for labor
e. a recession in the economy
ANSWER: c
54. Seasonal unemployment refers to unemployment that results from

ANSWER: d
55. Structural unemployment refers to unemployment that results from

a. inefficiencies in the market for labor that prolong the job search
ANSWER: b
56. Cyclical unemployment results from

ANSWER: e
57. Jacqueline, a brilliant new Ph.D. in economics, has turned down many job offers because she hopes eventually to
teach at one of the top ten universities in her field. The type of unemployment she is experiencing is
a. frictional
b. structural
c. seasonal

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d. cyclical
e. underemployment
ANSWER: a
58. Jamal lost his job as a shipbuilder during 2004. His shipyard never reopened, and so his very specialized skills are no
longer in demand. Jamal's unemployment is best classified as
a. cyclical
b. structural
c. seasonal
d. frictional
e. voluntary
ANSWER: b
59. In which of the following industries are workers least likely to suffer from cyclical unemployment?
a. new home construction
b. automobile manufacturing
c. carpet installation
d. education
e. tourism
ANSWER: d
60. Most of the unemployment experienced in the United States during the Great Depression was
a. cyclical
b. structural
c. seasonal
d. frictional
e. voluntary
ANSWER: a
61. Which of the following types of unemployment is the hardest to reduce?

a. cyclical
b. structural
c. voluntary
d. involuntary
e. speculative
ANSWER: b
62. Which type of unemployment is most likely to help the economy become more efficient?
a. cyclical
b. structural
c. seasonal
d. frictional
e. underemployment

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ANSWER: d
63. The impact of __________ unemployment is removed from official unemployment figures that are reported monthly.
a. cyclical
b. structural
c. seasonal
d. frictional
e. involuntary
ANSWER: c
64. Unemployment arising from mismatch of skills is called

e. underemployment
ANSWER: b
65. Structural unemployment results from

b. the availability of unemployment insurance
c. monetary cost and the time it takes to find the best job
e. prolonged declines in business activity
ANSWER: a
66. Cyclical unemployment results from

c. monetary cost and the time it takes to find the best job
e. prolonged declines in business activity
ANSWER: e
67. If the official unemployment rate increases in August from its July level, we can conclude that __________
unemployment is responsible for the increase.
a. seasonal
b. cyclical
c. structural
d. frictional
e. any of the causes of
ANSWER: e
68. If the official unemployment rate increases in January from its December level because the Christmas season is over,
Name: Class: Date:

we can conclude that __________ unemployment is responsible for the increase.
a. seasonal
b. cyclical
c. structural
d. frictional
e. any one of the causes of
ANSWER: a
69. If the official unemployment rate increases in March from its February level because of sluggish sales in the auto
industry, we can conclude that __________ unemployment is responsible for the increase.
a. seasonal
b. cyclical
c. structural
d. frictional
e. any one of the causes of
ANSWER: b
70. Which type of unemployment is experienced by a person who is laid off at an office because new technology reduces
the need to handle customer service inquiries?
a. seasonal
b. cyclical
c. voluntary
d. structural
e. frictional
ANSWER: d
71. Seasonal unemployment results from

a. unrealistic expectations about the availability of employment
d. decreases in demand for labor at certain times of the year
e. periodic increases in business activity
ANSWER: d
72. Which of the following is most likely to reduce structural unemployment?

a. a reduction in wage rates
b. increasing efficiency of the job search through 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 compensation
ANSWER: c
73. Workers who are temporarily unemployed but who normally find jobs quickly are called
a. frictionally unemployed
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b. cyclically unemployed
d. structurally unemployed
e. discouraged workers
ANSWER: a
74. Which type of unemployment is likely to increase the most in a recession?

b. seasonal unemployment
c. structural unemployment
e. employment
ANSWER: d
75. Which of the following statements about unemployment is true?

a. There is only one kind of unemployment.
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
76. The best example of a frictionally unemployed worker is one who

a. reduces productivity by causing frictions in a business
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
77. When the economy is at full employment, what types of unemployment may exist?
a. none
b. structural and frictional
c. seasonal and cyclical
d. frictional, cyclical, and structural
e. cyclical
ANSWER: b
78. Full employment

a. exists when everyone in the economy has a job
b. exists when everyone who wants a job has one
c. exists when the unemployment rate is zero

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d. exists when everyone in the labor force has a job
e. will always include some unemployment
ANSWER: e
79. Which of the following is not consistent with full employment?

a. an unemployment rate of 5 percent or 6 percent
b. seasonal unemployment
c. structural unemployment
e. frictional unemployment
ANSWER: d
80. 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. comparative advantage is not possible without full employment
e. inflation will be lower when full employment is achieved
ANSWER: c
81. An increase in unemployment benefits is likely to do which of the following?

a. reduce a person's incentive to look for work
b. reduce the opportunity cost of being unemployed
c. provide a better safety net for employed families
d. make it more difficult for people to search longer for jobs appropriate to their skill levels
e. increase the need to accept the first job available after becoming unemployed
ANSWER: a
82. 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
83. It is difficult to compare unemployment rates across countries because methods of measuring unemployment are not
standardized.
a. True
b. False
ANSWER: a
84. If a new 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.
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a. True
b. False
ANSWER: a
85. 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
86. Exclusion of which of the following tends to understate the true extent of unemployment in the economy?
a. children
b. retired persons
c. students
d. people who do not want to work
e. discouraged workers
ANSWER: e
87. Assuming the total population is 150 million, the labor force is 100 million, and 94 million workers are employed, the
unemployment rate is
a. 4 percent
b. 8 percent
c. 6 percent
d. 10 percent
e. 15 percent
ANSWER: c
88. 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
89. The unemployment rate does not measure all 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 the discouraged workers
c. the discouraged workers and the frictionally unemployed
d. the frictionally unemployed and the structurally unemployed
e. the cyclically unemployed and the frictionally unemployed
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ANSWER: b
90. 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
91. Which of the following factors makes the official unemployment rate an overstatement of the actual level of
unemployment in the economy?
a. exclusion of discouraged workers
b. inclusion of those only working part-time
c. inclusion of those who are overqualified for their current jobs
d. exclusion of those who work at a family business
e. inclusion of those who pretend to look for work in order to qualify for welfare programs
ANSWER: e
92. Because of the way discouraged workers and part-time employment are measured, the official unemployment rate
a. overstates the unemployment problem
b. understates the unemployment problem
c. truly reflects the level of unemployment
d. overstates the size of the labor force
e. understates the size of the labor force
ANSWER: b
93. If the price level increases by 2 percent each year, the inflation rate is increasing.
a. True
b. False
ANSWER: b
94. Inflation is defined as a sustained increase in the price level.

a. True
b. False
ANSWER: a
95. A sustained decrease in the price level is known as deflation.

a. True
b. False
ANSWER: a
96. Inflation is

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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
97. If the inflation rate is higher than expected, which of the following groups in 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
98. The view that union wage demands may be a source of inflation would be best associated with the
a. supply shock view of inflation
b. demand pull view of inflation
c. cost push view of inflation
d. demand push view of inflation
e. monetary view of inflation
ANSWER: c
99. During periods of high inflation, people want to hold as much money as possible.
a. True
b. False
ANSWER: b
100. Hyperinflation refers to a period of extremely erratic inflation rates.

a. True
b. False
ANSWER: b
101. During the late 1960’s the inflation experienced in the United States as a result of the spending on the Vietnam War
is referred to as
a. hyperinflation
b. demand-pull inflation
c. wartime inflation
d. cost-push inflation
e. cyclical inflation
ANSWER: b
102. During the 1970’s the inflation experienced in the United States as a result of OPEC oil price increases is referred to
as
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a. demand-pull inflation
b. hyperinflation
c. cost-push inflation
d. cyclical inflation
e. temporary inflation
ANSWER: c
103. Demand-pull inflation is worse for an economy than cost-push inflation because in addition to higher prices,
demand-pull inflation also reduces employment.
a. True
b. False
ANSWER: b
104. Deflation refers to

a. decreasing relative prices
b. a decreasing price level
c. a slowing down of the rate of inflation
d. a slowing down of the rate of relative price decreases
e. a federal government policy of running budget surpluses
ANSWER: b
105. Hyperinflation refers to a situation in which

a. prices are rising extremely rapidly
b. prices are falling extremely rapidly
c. the price level is extremely high
d. the price level is extremely low
e. the price level is negative
ANSWER: a
106. Anticipated inflation causes more problems in the economy than unanticipated inflation.
a. True
b. False
ANSWER: b
107. The nominal interest rate is equal to the real interest rate minus the anticipated inflation rate.
a. True
b. False
ANSWER: b
108. Inflation is the hardest on those living on fixed incomes.

a. True
b. False
ANSWER: a

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109. The misery index is the sum of the unemployment rate and the inflation rate.
a. True
b. False
ANSWER: a
110. Joel just graduated from college and is looking for a job. Economists would classify Joel as
a. cyclically unemployed
d. frictionally unemployed
e. out of the labor force
ANSWER: d
111. Inflation can only be caused by an increase in aggregate demand.

a. True
b. False
ANSWER: b
112. If the aggregate demand curve shifts rightward,

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 only if there is also a leftward shift of the aggregate supply curve
e. the price level decreases and output decreases
ANSWER: c
113. If the aggregate supply curve shifts leftward,

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 only if there is also a rightward shift of the aggregate demand curve
e. the price level decreases and output increases
ANSWER: b
114. Inflation can be caused by

a. increases in aggregate demand only
b. increases in aggregate supply only
c. decreases in aggregate supply only
d. increases in aggregate supply or decreases in aggregate demand
e. increases in aggregate demand or decreases in aggregate supply
ANSWER: e
115. Which of the following would lead to the most inflation?

a. Both aggregate demand and aggregate supply increase.
Name: Class: Date:

b. Both aggregate demand and aggregate supply decrease.
c. Aggregate demand increases and aggregate supply decreases.
d. Aggregate demand increases and aggregate supply increases.
e. Aggregate supply decreases.
ANSWER: c
116. The difference between demand-pull inflation and cost-push inflation is that
a. demand-pull inflation is caused by movements of the aggregate supply curve; cost-push inflation is caused by
changes in firms' costs of production
b. cost-push inflation is caused by movements of the aggregate demand curve; demand-pull inflation is caused by
cyclical activity in the economy
c. demand-pull inflation is caused by movements of the aggregate demand curve; cost-push inflation is caused by
movements of the aggregate supply curve
d. demand-pull inflation is caused by government deficit spending; cost-push inflation is caused by firms
e. demand-pull inflation is caused by foreign demand; cost-push inflation is caused by domestic production
problems
ANSWER: c
Exhibit 7-1
117. The inflation illustrated in Exhibit 7-1 would be considered:

a. cost-pull inflation
b. cost-push inflation
c. demand-push inflation
d. demand-pull inflation
e. induced inflation
ANSWER: d
118. Demand-pull inflation is associated with

a. decreasing aggregate demand and lower unemployment
b. increasing aggregate demand and lower unemployment
c. decreasing aggregate demand and greater unemployment
Name: Class: Date:

d. increasing aggregate demand and greater unemployment
e. a rising price level caused by a shift in either aggregate demand or aggregate supply
ANSWER: b
119. Which is true of cost-push inflation?

a. It occurs when the aggregate demand curve shifts rightward.
b. It occurs when the aggregate supply curve shifts rightward.
c. It results in a decrease in the unemployment rate.
d. It results in a movement along the aggregate demand curve.
e. It is caused by the same factors that lead to demand-pull inflation.
ANSWER: d
120. What was the result of increased oil prices during the 1970s?
a. Aggregate demand decreased, causing cost-push inflation.
b. Aggregate demand increased, causing demand-pull inflation.
c. Aggregate supply increased, causing demand-pull inflation.
d. Aggregate supply increased, causing cost-push inflation.
e. Aggregate supply decreased, causing cost-push inflation.
ANSWER: e
121. Demand-pull inflation is caused by an

a. inward shift of the aggregate demand curve
b. inward shift of the aggregate supply curve
c. outward shift of the aggregate supply and demand curves
d. outward shift of the aggregate demand curve
e. outward shift of the aggregate supply curve
ANSWER: d
122. Cost-push inflation is typically caused by an

a. inward shift of the demand curve
b. inward shift of the aggregate supply and demand curves
c. outward shift of the demand curve
d. outward shift of the supply curve
e. inward shift of the supply curve
ANSWER: e
123. If the CPI in 2003 was 150 and the CPI in 2004 was 160, the inflation rate over the year was 10 percent.
a. True
b. False
ANSWER: b
124. If the CPI is 200, then the price level has doubled since the base year.
a. True
b. False
Name: Class: Date:

ANSWER: a
125. Demand-pull inflation is typically caused by rapidly rising costs of production.

a. True
b. False
ANSWER: b
126. Which period in U.S. economic history was not characterized by inflation?
a. 1917-1920
b. 1929-1933
c. 1947
d. 1978-1980
e. 1980-1989
ANSWER: b
127. Which of the following is true about U.S. history prior to 1945?
a. The inflation rate remained constant during this period.
b. Cost-push inflation led to depressions, 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
128. During which of the following decades was the U.S. inflation rate highest?
a. 1920s
b. 1930s
c. 1950s
d. 1970s
e. 1980s
ANSWER: d
129. In the United States,

a. the average inflation rate was higher before 1950 than after
b. the average inflation rate was higher after 1950 than before
c. inflation caused no serious problems before World War II
d. inflation caused no serious problems after World War II
e. the implicit price deflator was used to measure inflation before World War II, and the consumer price index
has been used since then.
ANSWER: b
130. Since the end of World War II, the U.S. price level has
a. increased eightfold
b. increased by an average of 10 percent each year
c. increased and decreased with equal regularity, leaving the price level almost constant
Name: Class: Date:

d. increased by 50 percent
e. doubled
ANSWER: a
131. Suppose the price levels in four successive years are 100, 120, 133, and 140. Which of the following is true?
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 reflation.
ANSWER: c
132. 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 it an employment contract
e. government increases the level of social security retirement benefits to correct for the effects of unanticipated
inflation
ANSWER: b
133. Since World War II, the Consumer Price Index has increased by an average of
a. 1.4% per year
b. 2.1% per year
c. 6.4% per year
d. 5.6% per year
e. 3.9% per year
ANSWER: e
134. If nominal wages increase 7 percent while the price level rises by 5 percent, real wages rise.
a. True
b. False
ANSWER: a
135. Anticipated inflation distorts markets more than does unanticipated inflation.
a. True
b. False
ANSWER: b
136. Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which
of the following is true?
a. Your real wage fell.
b. Your nominal wage fell.
c. Both your nominal and real wages decreased.
Name: Class: Date:

d. Although your nominal wage fell, your real wage increased.
e. Both nominal and real wages increased.
ANSWER: a
a. Your real wage fell.
b. Your nominal wage fell.
e. Both your nominal and real wages increased.
ANSWER: e
a. Your real wage increased.
b. Your nominal wage decreased.
e. Although your nominal wage rose, your real wage decreased.
ANSWER: a
139. Suppose you received a 4 percent increase in your nominal wage. Over the year, inflation runs about 7 percent.
Which of the following is true?
a. Your real wage increased.
b. Both the nominal and real wages increased.
e. Although your nominal wage rose, your real wage decreased.
ANSWER: e
140. A decrease in a person's real wage necessarily means

a. lower purchasing power
b. a lower nominal wage
c. a lower nominal wage after payment of taxes
d. a higher nominal wage
e. a higher nominal wage after payment of taxes
ANSWER: a
141. An increase in a person's real wage necessarily means

a. greater purchasing power
b. a lower nominal wage
c. a lower nominal wage after payment of taxes
d. a higher nominal wage
Name: Class: Date:

e. a higher nominal wage after payment of taxes
ANSWER: a
142. Anticipated inflation

a. allows us to eliminate the problems associated with unemployment
b. causes more problems than unanticipated inflation
c. causes fewer problems than unanticipated inflation
d. is easy to predict for economists
e. prevents workers from increasing their purchasing power
ANSWER: c
143. If the inflation rate is 5 percent and you receive a wage increase of 5 percent,
a. your nominal income declines but your real income increases
b. both your nominal income and your real income increase by 5 percent
c. your nominal income increases but your real income declines
d. both your nominal income and your real income decrease by 5 percent
e. your nominal income increases by 5 percent but your real income is unchanged
ANSWER: e
144. The higher you think the inflation rate is likely to be,
a. the higher the nominal interest rate you will offer as a borrower and want as a lender
b. the higher the nominal interest rate you will offer as a borrower, and the lower the rate you will want as a
lender
c. the lower the nominal interest rate you will offer as a borrower and want as a lender
d. the higher the real interest rate you will want as a lender
e. the higher the real interest rate you will offer as a borrower
ANSWER: a
145. 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
146. 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

Name: Class: Date:

147. During periods when the inflation rate fluctuates widely,
a. all relative prices increase at the same rate, leaving money prices constant
b. all money prices rise at the same rate, causing relative prices to increase
c. economic efficiency increases because decision makers pay closer attention to changes in money prices
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
148. If future price changes were perfectly anticipated by both borrowers and lenders, what would happen to the real
interest rate in the future if the price level changed?
a. it would increase
b. it would decrease
c. it would decrease by the amount of the price increase
d. it would increase by the amount of the price increase
e. it would not change
ANSWER: e
149. In periods of high inflation,

a. people want to hold as much money as possible
b. the purchasing power of money is decreasing
c. nobody wants to work and earn income
d. low nominal interest rates are likely to result
e. nobody wants to buy goods and services
ANSWER: b
150. 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
151. Some economists have argued that inflation during the 1970s contributed to the U.S. economy's relatively slow
growth rate. What is the basis for this view?
a. Inflation usually lowers employment, thus slowing growth.
b. If inflation is anticipated, it is particularly harmful because cost of living increases are built into wage
settlements, which only worsens the problem.
c. High and variable inflation rates increased uncertainty, thus making business decisions more difficult.
d. Lenders were less interested in making short-term loans than in making long-term loans.
e. Inflation during the 1970s created increased activity on Wall Street, which drew funds that could have been
used for truly productive purposes.
ANSWER: c

Name: Class: Date:

152. During inflationary times, which of the following is unlikely to happen?
a. People change their expectations about the inflation rate.
b. Workers try to get increases in nominal wages.
c. People are willing to lend money for longer periods.
d. Relative price changes become harder to recognize.
e. People buy physical assets as a hedge against rising prices.
ANSWER: c
153. 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. creates uncertainty about the value of the dollar relative to foreign currencies
d. enhances money's importance as a link between the present and the future
e. makes contracts easier to negotiate
ANSWER: d
154. Relative prices describe the terms at which individual goods are exchanged for one another.
a. True
b. False
ANSWER: a
155. During periods of inflation, all prices increase.

a. True
b. False
ANSWER: b
156. In times of rapid inflation,

a. money loses its use as a store of value
b. money becomes an attractive store of wealth
c. people postpone purchases as long as possible
d. people spend less in transactions costs
e. people tend to save more money
ANSWER: a
157. 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
158. The problems that inflation creates for society are caused primarily by
Name: Class: Date:

a. greed on the part of sellers
b. uncertainty regarding the rate at which different prices are increasing or will increase
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
159. The Consumer Price Index measures the cost of

a. all goods and services produced in the U.S. economy
b. all goods produced in the U.S. economy
c. a fixed market basket of consumer goods and services produced in the U.S. economy
d. a fixed market basket of producer goods and services
e. food and energy in the U.S. economy
ANSWER: c
160. The real interest rate can be negative.

a. True
b. False
ANSWER: a
161. Unanticipated inflation generally hurts borrowers and benefits lenders.

a. True
b. False
ANSWER: b
162. If the expected inflation rate is high, the nominal interest rate will be low.
a. True
b. False
ANSWER: b
163. An increase in the interest rate will increase the demand for loanable funds.
a. True
b. False
ANSWER: b
164. An increase in the demand for loanable funds, other things constant, will increase the interest rate.
a. True
b. False
ANSWER: a
165. If Dave loans funds at 2 percent while the inflation rate is 4 percent, his real rate of interest is -2 percent.
a. True
b. False
ANSWER: a
Name: Class: Date:
166. An increase in the supply of loanable funds, other things constant, will increase the interest rate.
a. True
b. False
ANSWER: b
167. The supply of loanable funds curve slopes downward to the right.
a. True
b. False
ANSWER: b
168. The nominal interest rate is determined in the market for loanable funds.
a. True
b. False
ANSWER: a
169. In periods of high inflation,

a. people want to hold as much money as possible
b. the purchasing power of money is increasing
c. nobody wants to work and earn income
d. high nominal interest rates are likely to result
e. nobody wants to buy goods
ANSWER: d

b. Inflation is more damaging if it is anticipated than if it is not anticipated.
d. Those who have loaned money at an interest rate below the rate of inflation suffer economic losses.
e. If people anticipate inflation, their actions will prevent the inflation.
ANSWER: d

b. Inflation is more damaging if it is anticipated than if it is not anticipated.
d. Those who have borrowed money at an interest rate below the rate of inflation will generally benefit.
e. If people anticipate inflation, their actions will prevent the inflation.
ANSWER: d
172. 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
Name: Class: Date:

d. there is not enough information to determine the real interest rate
e. the real interest rate is zero
ANSWER: c
173. If the nominal interest rate is 6 percent and the inflation rate is 4 percent,
a. the real interest rate is 10 percent
b. the real interest rate is 2 percent
c. the real interest rate is -2 percent
d. the real interest rate is -10 percent
e. there is insufficient information to determine the real rate of interest
ANSWER: b
174. 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 the inflation rate is 5 percent, what is the nominal interest rate?
a. 13 percent
b. 8 percent
c. 5 percent
d. 3 percent
e. 1 percent
ANSWER: a
175. 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
176. 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
177. 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

Name: Class: Date:

ANSWER: c
178. 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
179. If people suddenly become more willing to lend money, what happens to the equilibrium rate of interest?
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
180. Unanticipated inflation redistributes income across groups in society. Among the winners are
a. those who loan money
b. those on fixed incomes
c. small savers
d. those who borrow at fixed interest rates
e. those who hold large amounts of cash
ANSWER: d
181. 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, what 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
182. 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, what was the real rate of interest Tony received?
a. 14 percent
b. 7 percent
c. 4 percent
d. 0 percent
e. -7 percent
ANSWER: d
Name: Class: Date:
183. Which of the following events would most likely cause the nominal interest rate to fall?
a. The supply of loanable funds decreases.
b. Both the supply of and the demand for loanable funds increase.
c. Both the supply of and the demand for loanable funds decrease.
d. The supply of loanable funds increases and the demand for loanable funds decreases.
e. The supply of loanable funds decreases and the demand for loanable funds increases.
ANSWER: d
184. The real interest rate can be expressed as the

a. nominal interest rate minus the real interest rate
b. inflation rate minus the nominal interest rate
c. nominal interest rate minus the inflation rate
d. inflation rate minus the real interest rate
e. nominal interest rate plus the inflation rate
ANSWER: c
185. During periods of inflation, the real value (purchasing power) of a given amount of nominal dollars decreases.
a. True
b. False
ANSWER: a
186. 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
187. 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 works under a labor contract calling for a fixed wage for the next three years
d. an individual who contracts to lend money for a fixed rate of interest for the next three years
e. an individual working at the minimum wage (which seldom changes)
ANSWER: a
188. Unanticipated inflation creates problems for society because

a. it increases the wealth of people who hold cash
b. it promotes social cooperation by encouraging self-restraint
c. it reduces the desire to plan and reduces the complexity of planning
d. it redistributes wealth and income
e. it requires buyers to spend less time acquiring information about prices
Name: Class: Date:

ANSWER: d
189. Unanticipated inflation is usually viewed as undesirable because it

a. reduces everyone's nominal wages
b. redistributes income and wealth
c. is accompanied by reductions in real GDP
d. usually results in the public sector growing less rapidly than the private sector
e. lets lenders gain at the expense of borrowers
ANSWER: b
190. In April of 2010, the US economy added 290,000 jobs but the unemployment rate still rose from 9.7% to
9.9%. Which of the following best explains how this can happen?
a. the size of the labor force shrunk
b. the number of unemployed workers also rose but by a smaller percentage
c. the number of illegal immigrants rose substantially
d. it was a mistake
e. the number of unemployed workers also rose but by an even greater percentage
ANSWER: e
191. The labor force participation rate climbs with education.

a. True
b. False
ANSWER: a
192. Unemployment rates __________ during contractions and __________ during expansions.
a. rise, fall
b. fall, fall
c. rise, stay the same
d. stay the same, fall
e. fall, rise
ANSWER: a
193. The unemployment rate trended down from the early 1980s to 2000 because there were fewer people in the
workforce like
a. Juan, age 28
b. Chien, age 38
c. Billy, age 18
d. Daniel, age 48
e. Gregory, age 58
ANSWER: c
194. An occupation with a high unemployment rate is

a. professionals in general
b. attorneys
Name: Class: Date:

c. technical workers in general
d. auto workers
e. Web page designers
ANSWER: d
195. 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
196. The metropolitan with the lowest unemployment rate is

a. Detroit
b. Atlanta
c. San Diego
d. Honolulu
e. Portland
ANSWER: d
197. An example of structural unemployment caused by a change in tastes and preferences is

a. newspaper journalists
b. administrative assistants
c. lifeguards
d. steelworkers during recessions
e. None of the answers is correct
ANSWER: a
198. Full employment is when the unemployment rate is zero.

a. True
b. False
ANSWER: b
199. Inflation rates differ across regions mostly because of differences in housing prices.
a. True
b. False
ANSWER: a
200. Since 1980, a country that has experienced deflation is

a. the U.S.
b. France
c. Germany
d. Japan
e. Italy
ANSWER: d
Name: Class: Date:
Exhibit 7-2
201. The inflation illustrated in Exhibit 7-2 would be considered:

a. cost-pull inflation
b. cost-push inflation
c. demand-push inflation
d. demand-pull inflation
e. induced inflation
ANSWER: b
202. The “long-term unemployed” are those who are unemployed for:
a. 8 weeks or longer
b. 12 weeks or longer
c. 18 weeks or longer
d. 27 weeks or longer
e. 52 weeks or longer
ANSWER: d

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ECON MACRO4 4th Edition McEachern

Chapter 07—Unemployment and Inflation

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

4. Which of the following is not considered a cost of unemployment?

5. Measured unemployment includes discouraged workers.

Chapter 07—Unemployment and Inflation

9. The labor force consists of all

12. The unemployment rate is the

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Chapter 07—Unemployment and Inflation

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

Chapter 07—Unemployment and Inflation

19. A discouraged worker is one who

20. Which of the following are classified as "discouraged workers"?

21. Which of the following people would be counted as unemployed?

23. Which of the following is true about labor force participation?

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Chapter 07—Unemployment and Inflation

25. Which of the following is not a way to become officially unemployed?

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

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

Chapter 07—Unemployment and Inflation

31. The labor force participation rate is the number of people

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Chapter 07—Unemployment and Inflation

36. Different demographic groups

Chapter 07—Unemployment and Inflation

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Chapter 07—Unemployment and Inflation

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Chapter 07—Unemployment and Inflation

53. Frictional unemployment refers to unemployment that results from

54. Seasonal unemployment refers to unemployment that results from

55. Structural unemployment refers to unemployment that results from

56. Cyclical unemployment results from

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Chapter 07—Unemployment and Inflation

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

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Chapter 07—Unemployment and Inflation

64. Unemployment arising from mismatch of skills is called

65. Structural unemployment results from

66. Cyclical unemployment results from

Chapter 07—Unemployment and Inflation

71. Seasonal unemployment results from

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

Chapter 07—Unemployment and Inflation

74. Which type of unemployment is likely to increase the most in a recession?

75. Which of the following statements about unemployment is true?

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

78. Full employment

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Chapter 07—Unemployment and Inflation

79. Which of the following is not consistent with full employment?

80. Full employment is considered a major economic goal because

81. An increase in unemployment benefits is likely to do which of the following?

Chapter 07—Unemployment and Inflation

88. Underemployment refers to

Chapter 07—Unemployment and Inflation

94. Inflation is defined as a sustained increase in the price level.

95. A sustained decrease in the price level is known as deflation.

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Chapter 07—Unemployment and Inflation

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