Macroeconomics 7th Edition Blanchard

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Macroeconomics, 7e (Blanchard)
Chapter 7: The Labor Market

7.1 A Tour of the Labor Market

1) Which of the following is considered out of the labor force?

A) the unemployed
B) those temporarily laid off who will soon be recalled
C) those who worked full time, but in a family business
D) those individuals who have started searching for employment for the first time
E) none of the above
Answer: E
Diff: 1

Use the information provided below to answer the following question(s).

The non-institutional civilian population is 250 million, of which 100 million are employed and
10 million are unemployed.

2) Based on the information above, the unemployment rate is

A) 4%.
B) 6.6%.
C) 9.1%.
D) 10%.
E) 11.1%.
Answer: C
Diff: 2

3) Based on the information above, the labor force participation rate is

A) 36%.
B) 40%.
C) 44%.
D) 90.1%.
E) 66%.
Answer: C
Diff: 2

4) Based on the information above, the non-employment rate is

A) 4%.
B) 9.1%.
C) 10%.
D) 60%.
E) 66%.
Answer: D
Diff: 2

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5) Which of the following individuals would be considered unemployed?
A) an individual who works only part-time
B) an individual who works full-time in a family business, but is not paid
C) an individual who is not working and is not looking for work
D) all of the above
E) none of the above
Answer: E
Diff: 2

6) Based on the data provided in the chapter, which of the following represents the largest
component of the labor force?
A) discouraged workers
B) retired individuals
C) employed
D) unemployed
Answer: C
Diff: 1

7) The labor force is defined as

A) the sum of the employed and unemployed.
B) the total number employed.
C) the total number of working age individuals in the population.
D) the sum of the number of employed, unemployed and discouraged individuals.
Answer: A
Diff: 1

8) The participation rate in the United States in 2010 was approximately equal to
A) 96%.
B) 90%.
C) 65%.
D) 26%.
E) 5%.
Answer: C
Diff: 1

9) Which of the following represents the participation rate?

A) the ratio of the number employed to the size of the labor force
B) the ratio of the number employed to the civilian noninstitutional population
C) the ratio of the labor force to the civilian noninstitutional population
D) the ratio of the labor force to the total number of employed and unemployed workers
Answer: C
Diff: 1

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10) The average amount of time people spend unemployed is approximately
A) 1 month.
B) 6 months .
C) 12 months.
D) none of the above
Answer: D
Diff: 2

11) The Current Population Survey interviews approximately how many households each
month?
A) 5,000
B) 10,000
C) 60,000
D) 100,000
Answer: C
Diff: 1

12) In the United States, how many workers become unemployed, on average, every day?
A) 5,000
B) 10,000
C) 50,000
D) 100,000
Answer: C
Diff: 1

13) In the United States, the average length of time people spend unemployed is
A) approximately one month.
B) between two and three months.
C) between ten and eleven months.
D) greater than twelve months.
Answer: B
Diff: 2

14) A reduction in the unemployment rate will tend to cause which of the following?
A) an increase in the separation rate
B) a reduction in the nominal wage
C) a reduction in the duration that one is unemployed
D) none of the above
Answer: C
Diff: 2

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15) When the unemployment rate is low, we would expect that
A) the probability of losing a job is high.
B) the probability of losing a job is low.
C) the probability an unemployed individual will find another job is low.
D) the separation rate will increase.
Answer: B
Diff: 2

16) The participation rate in the U.S. has increased steadily over time. First, explain what the
participation rate represents. Second, explain why the participation rate has increased.
Answer: The participation rate is the ratio of the labor force to the working age population. One
of the reasons for the significant increase in the participation rate is the increasing participation
of women in the labor force.
Diff: 2

17) What effect does the existence of discouraged workers have on the ability of the official
unemployment rate to provide accurate information about the extent to which labor is employed?
Answer: Discouraged workers are individuals who have stopped searching for employment
because, for example, they have become "discouraged" with the prospects of finding
employment. Once they stop searching (after 4 weeks), they are no longer counted as
unemployed and, therefore, in the labor force. Such a dynamic would cause the official
unemployment to fall. Alternatively, the existence of discouraged workers implies that the
official unemployment rate underestimates the extent to which labor is being is not being used.
This explains why the existence of discouraged workers can cause the unemployment rate to be
an imperfect measure of the utilization of labor.
Diff: 2

18) First, provide a brief explanation of what the unemployment rate measures. Second, explain
how changes in each of the components of the unemployment rate can cause changes in the
unemployment rate.
Answer: The unemployment rate measures the percentage of the labor force that is unemployed.
The unemployment rate is based on a monthly survey of households. Individuals are classified as
employed, unemployed, or out of the labor force. Individuals employed or unemployed are in the
labor force. Suppose individuals decide to enter the labor force for the first time. This increase in
the size of the labor force, all else fixed, would cause an increase in the unemployment rate.
On the other hand, if there were an increase in the number of individuals unemployed (caused
by, for example, firms laying off workers as demand for their products falls), we would observe
no change in the labor force but an increase in the unemployment rate.
Diff: 2

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7.2 Movements in Unemployment

1) Data on labor-force flows show that

A) almost all separations are due to death.
B) almost all separations are due to serious illness.
C) almost all separations are quits.
D) almost all separations are layoffs.
E) none of the above
Answer: E
Diff: 2

2) Data on labor-force flows show that

A) in any given month, almost none of the unemployed gets jobs.
B) in any given month, almost all of the unemployed gets jobs.
C) the average duration of unemployment is about 2 weeks.
D) the average duration of unemployment is about 2 years.
E) in any given month, about one-fourth of the unemployed get jobs.
Answer: E
Diff: 2

3) Which of the following variables is most directly determined in the labor market?
A) stock prices
B) nominal wages
C) interest rates
D) all of the above
E) none of the above
Answer: B
Diff: 1

4) The two labor markets in the "dual labor market" are

A) southern versus northern.
B) western versus eastern.
C) English speaking versus non-English speaking.
D) domestic versus foreign.
E) none of the above
Answer: E
Diff: 1

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5) When the Current Population Survey (CPS) was introduced in 1940, it was based on a survey
of approximately 8,000 households. The CPS survey is now based on a survey of how many
households?
A) 8,000
B) 10,000
C) 12,000
D) 20,000
E) 60,000
Answer: E
Diff: 2

6) As the unemployment rate falls,

A) the proportion of the unemployed finding a job increases.
B) the separation rate increases.
C) the young and unskilled experience larger-than-average decreases in unemployment.
D) both A and C.
E) all of the above
Answer: D
Diff: 2

7.3 Wage Determination

1) Which of the following statements about wage setting is true?

A) most workers in the U.S. have their wages set by formal contracts.
B) formal contracts play a more important role in Japan and Western Europe than in the United
States.
C) the minimum wage in the U.S. is about 75% of the average wage.
D) all of the above
Answer: B
Diff: 1

2) The reservation wage is

A) the wage that an employer must pay workers to reduce turnover to a reasonable level.
B) the wage that ensures a laid-off individual will wait for re-hire, rather than find another job.
C) the lowest wage firms are allowed by law to pay workers.
D) the wage offer that will end a labor-strike.
E) none of the above
Answer: E
Diff: 1

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3) Efficiency wage theory suggests that
A) workers will be paid less than their reservation wage.
B) productivity might drop if the wage rate is too low.
C) the government can only set tax rates so high before people will prefer not to work.
D) unskilled workers will have a lower turnover rate than skilled workers.
E) firms will be more resistant to wage increases as the labor market tightens.
Answer: B
Diff: 2

4) If efficiency wage theory is valid, we would expect a relatively low premium over the
reservation wage when
A) the unemployment rate is low.
B) the job requires very little training.
C) workers can be easily monitored.
D) workers have few other options for employment in the area.
E) all of the above
Answer: C
Diff: 2

5) Henry Ford's experiment with efficiency wages resulted in

A) a dramatic drop in productivity.
B) a dramatic increase in the turnover rate.
C) a reduction in the layoff rate.
D) new problems with the work force, like drunkenness and reckless driving.
E) no noticeable effects.
Answer: C
Diff: 2

6) In the wage-setting relation, the nominal wage tends to decrease when

A) the price level increases.
B) the unemployment rate decreases.
C) unemployment benefits decrease.
D) the minimum wage increases.
E) all of the above
Answer: C
Diff: 1

7) In the wage setting relation W = PeF(u,z), the variable z does not include which of the
following variables?
A) the minimum wage
B) unemployment benefits
C) the extent to which firms mark up prices over their marginal cost
D) all of the above
E) none of the above
Answer: C
Diff: 1

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8) Labor productivity is represented by which of the following?
A) the ratio of output to employment
B) workers per unit of capital
C) capital per worker
D) the ratio of output to population
E) the ratio of output to the labor force
Answer: A
Diff: 1

9) Today, about ________ of U.S. workers have their wages set by collective bargaining
agreements.
A) 10%
B) 15%
C) 20%
D) 25%
Answer: A
Diff: 2

10) Explain several implications and characteristics of efficiency wage theories.

Answer: The efficiency wage theory suggests that firms will pay workers a wage in excess of
the workers' reservation wage to minimize quits and to increase productivity. The efficiency
wage theory also suggests that nominal wages will be a function of labor market conditions. As
the unemployment rate falls, the nominal wage will rise.
Diff: 2

11) Explain how an increase in the unemployment rate will affect bargaining power and nominal
wages.
Answer: As the unemployment rate increases, it is more difficult for individuals to find
employment at other firms. So, workers' bargaining power will fall. As bargaining power falls,
the nominal wage will fall.
Diff: 2

12) First, explain what the WS relation represents. Second, explain why it has its particular
shape.
Answer: The WS relation illustrates the effect of changes in the unemployment rate on the real
wage implied by the wage-setting behavior of firms and workers. The WS curve (or relation) is
downward sloping because as the unemployment rate increases, workers have less bargaining
power so the nominal wage will decrease. This decrease in W, given P, implies that the real wage
will also fall. Hence, the WS curve is downward sloping.
Diff: 2

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7.4 Price Determination

1) The price setting equation is represented by the following: P = (1 + m)W. When there is
perfect competition, we know that m will equal
A) W.
B) P.
C) 1.
D) W/P.
E) none of the above
Answer: C
Diff: 2

2) Explain why nominal wages are a function of the expected price level.
Answer: Workers and firms care about the real wage. Nominal wages are typically set for a
period of time by contracts. Individuals will, therefore, be concerned about what the future price
level will be when determining the nominal wage. When setting the nominal wage, individuals
will form expectations of what the future price level will be. They will use this to help determine
the nominal wage.
Diff: 2

7.5 The Natural Rate of Unemployment

1) The natural rate of unemployment is the rate of unemployment

A) that occurs when the money market is in equilibrium.
B) that occurs when the markup of prices over costs is zero.
C) where the markup of prices over costs is equal to its historical value.
D) that occurs when both the goods and financial markets are in equilibrium.
E) none of the above
Answer: E
Diff: 2

2) The natural level of output is the level of output that occurs when
A) the goods market and financial markets are in equilibrium.
B) the economy is operating at the unemployment rate consistent with both the wage-setting and
price-setting equations.
C) the markup (m) is zero.
D) the unemployment rate is zero.
E) there are no discouraged workers in the economy.
Answer: B
Diff: 2

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3) Suppose we wish to examine the determinants of the equilibrium real wage and equilibrium
level of employment (N). In a graph with the real wage on the vertical axis, and the level of
employment on the horizontal axis, the price-setting relation will now be
A) a vertical line.
B) a horizontal line.
C) an upward sloping line.
D) a downward sloping line.
E) kinked at the natural rate of unemployment.
Answer: B
Diff: 2

4) Suppose we wish to examine the determinants of the equilibrium real wage and equilibrium
level of employment (N). In a graph with the real wage on the vertical axis, and the level of
employment on the horizontal axis, the wage-setting relation will now be
A) a vertical line.
B) a horizontal line.
C) an upward sloping line.
D) a downward sloping line.
E) a curve that first slopes upward, then downward.
Answer: C
Diff: 2

5) The natural level of employment (N) will increase when which of the following occurs?
A) an increase in the markup of prices over costs
B) a reduction in unemployment benefits
C) an increase in the actual unemployment rate
D) all of the above
E) none of the above
Answer: B
Diff: 2

6) Suppose workers and firms expect the overall price level to increase by 5%. Given this
information, we would expect that
A) the nominal wage will increase by less than 5%.
B) the nominal wage will increase by exactly 5%.
C) the nominal wage will increase by more than 5%.
D) the real wage will increase by 5%.
E) the real wage will increase by less than 5%.
Answer: B
Diff: 2

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7) Suppose the actual unemployment rate decreases. This will cause
A) an upward shift in the WS curve.
B) a downward shift in the WS curve.
C) an upward shift in the PS curve.
D) a downward shift in the PS curve.
E) none of the above
Answer: E
Diff: 2

8) Suppose the actual unemployment rate increases. This will cause

A) an upward shift in the WS curve.
B) a downward shift in the WS curve.
C) an upward shift in the PS curve.
D) a movement along the WS and the PS curves.
E) none of the above
Answer: D
Diff: 2

9) With the real wage on the vertical axis and the unemployment rate on the horizontal axis, we
know that
A) the WS curve is upward sloping.
B) the WS curve is downward sloping.
C) the PS curve is upward sloping.
D) the PS curve is downward sloping.
Answer: B
Diff: 2

10) Based on wage setting behavior, we know that a reduction in the unemployment rate will
cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the WS curve.
Answer: C
Diff: 2

11) Based on price setting behavior, we know that a reduction in the unemployment rate will
cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the PS curve.
Answer: A
Diff: 2

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12) Suppose the aggregate production function is given by the following: Y = AN. Given this
information, we know that labor productivity is represented by which of the following?
A) 1/A
B) A
C) 1/N
D) N/Y
Answer: B
Diff: 2

13) Suppose the aggregate production function is given by the following: Y = N. Given this
information, we know that labor productivity is represented by which of the following?
A) 1/N
B) N
C) N/Y
D) 1
Answer: D
Diff: 2

14) A reduction in unemployment benefits will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: B
Diff: 2

15) An increase in the minimum wage will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: A
Diff: 2

16) Suppose that increased international trade makes product markets more competitive in the
U.S. Given this information, we would expect to observe which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: C
Diff: 2

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17) With the real wage on the vertical axis and employment (N) on the horizontal axis, we know
that
A) the WS curve is upward sloping.
B) the WS curve is downward sloping.
C) the PS curve is upward sloping.
D) the PS curve is downward sloping.
Answer: A
Diff: 2

18) Based on our understanding of the labor market model presented in Chapter 6, we know that
an increase in the minimum wage will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
Answer: A
Diff: 2

19) Based on our understanding of the labor market model presented in Chapter 6, we know that
an increase in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
Answer: B
Diff: 2

20) Based on our understanding of the labor market model presented in Chapter 6, we know that
a reduction in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) an increase in the natural rate of unemployment.
D) a reduction in the natural rate of unemployment and no change in the real wage.
Answer: A
Diff: 2

21) For this question, assume that Y = N. Based on our understanding of the labor market model
presented in Chapter 6, we know that an increase in the minimum wage will cause
A) an increase in the natural level of output.
B) a reduction in the natural level of output.
C) no change in the natural level of output.
D) an increase in the natural level of employment.
Answer: B
Diff: 2

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22) For this question, assume that Y = N. Based on our understanding of the labor market model
presented in Chapter 6, we know that a reduction in the markup will cause
A) an increase in the natural level of output.
B) a reduction in the natural level of output.
C) no change in the natural level of output.
D) a reduction in the natural level of employment.
Answer: A
Diff: 2

23) Based on wage setting behavior, we know that an increase in the unemployment rate will
cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the WS curve.
Answer: B
Diff: 2

24) Based on price setting behavior, we know that an increase in the unemployment rate will
cause
A) no change in the real wage.
B) a reduction in the real wage.
C) an increase in the real wage.
D) an upward shift of the PS curve.
Answer: A
Diff: 2

25) An increase in unemployment benefits will tend to cause which of the following?
A) a downward shift in the WS curve
B) an upward shift in the PS curve
C) an upward shift in the WS curve
D) a downward shift in the PS curve
E) none of the above
Answer: C
Diff: 2

26) A reduction in the minimum wage will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: B
Diff: 2

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27) Explain what effect a reduction in the unemployment rate will have on the real wage based
on: (1) the WS relation; and (2) the PS relation.
Answer: A reduction in the unemployment rate will increase bargaining power, increase the
nominal wage, and therefore increase the real wage based on wage setting behavior. Changes in
the unemployment rate have no effect on the real wage based on price setting behavior.
Diff: 2

28) First, explain what the PS relation represents. Second, explain why it has its particular shape.
Answer: The PS relation illustrates the effect of changes in the unemployment rate on the real
wage implied by the price-setting behavior of firms. Firms set prices as a markup over their
marginal cost of producing goods. Given that the marginal cost is assumed to be independent of
the level of employment (and, therefore, the unemployment rate), changes in u will have no
effect on the price firms set and, therefore, on the real wage based on PS behavior.
Diff: 2

29) Graphically illustrate (using the WS and PS relations) and explain the effects of an increase
in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level
of employment, and the natural level of output.
Answer: An increase in the markup will cause firms to raise the price given the nominal wage.
This will cause the real wage based on price setting behavior to decrease; this is represented by a
downward shift in the PS curve. This reduction in the real wage will also occur with an increase
in the unemployment rate. So, the natural rate of unemployment will rise and the natural level of
employment and, therefore, output will fall. The equilibrium real wage will also be lower.
Diff: 2

30) Graphically illustrate (using the WS and PS relations) and explain the effects of an increase
in the minimum wage on the equilibrium real wage, the natural rate of unemployment, the
natural level of employment, and the natural level of output.
Answer: An increase in the minimum wage will cause the nominal wage based on wage setting
behavior to increase; this is represented as an upward shift in the WS relation. As the nominal
wage increases, firms will respond by increasing the price level so we will observe no change in
the equilibrium real wage. We will observe an increase in the natural rate of unemployment and
a reduction in both the natural level of employment and output.
Diff: 2

31) Based on your understanding of the labor market model presented by Blanchard (i.e., the WS
and PS relations), explain what types of policies could be implemented to cause a reduction in
the natural rate of unemployment.
Answer: The natural rate of unemployment will change whenever either the PS or WS relations
change. To reduce the natural rate, policy makers could implement polices that: (1) reduce
unemployment benefits; (2) reduce the minimum wage; or (3) increase competition in product
markets.
Diff: 2

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32) Explain how a reduction in the unemployment rate will affect bargaining power and nominal
wages.
Answer: As the unemployment rate decreases, it is easier for individuals to find employment at
other firms. So, workers' bargaining power will increase. As bargaining power increases, the
nominal wage will increase.
Diff: 2

33) Graphically illustrate (using the WS and PS relations) and explain the effects of a reduction
in the markup on the equilibrium real wage, the natural rate of unemployment, the natural level
of employment, and the natural level of output.
Answer: A reduction in the markup will cause firms to reduce the price given the nominal wage.
This will cause the real wage based on price setting behavior to increase; this is represented by a
upward shift in the PS curve. This increase in the real wage will also occur with an decrease in
the unemployment rate. So, the natural rate of unemployment will decrease and the natural level
of employment and, therefore, output will increase. The equilibrium real wage will also be
higher.
Diff: 2

34) Graphically illustrate (using the WS and PS relations) and explain the effects of a reduction
in the minimum wage on the equilibrium real wage, the natural rate of unemployment, the
natural level of employment, and the natural level of output.
Answer: A reduction in the minimum wage will cause the nominal wage based on wage setting
behavior to decrease; this is represented as an downward shift in the WS relation. As the nominal
wage deceases, firms will respond by reducing the price level so we will observe no change in
the equilibrium real wage. We will observe a decrease in the natural rate of unemployment and
an increase in both the natural level of employment and output.
Diff: 2

35) Explain what effect an increase in the unemployment rate will have on the real wage based
on: (1) the WS relation; and (2) the PS relation.
Answer: An increase in the unemployment rate will decrease bargaining power, decrease the
nominal wage, and therefore decrease the real wage based on wage setting behavior. Changes in
the unemployment rate have no effect on the real wage based on price setting behavior.
Diff: 2

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