Exercises Unit 5

Multiple choice questions:

1. The main objective of the unemployment benefit system is to reduce.

a. The rate of job creation.
b. The rate of job destruction.
c. Frictional unemployment.
d. Uncertainty of workers about their incomes.

2. According to the efficiency wage theory, paying a wage above the equilibrium price
would increase all of the following except:
a. The natural rate of unemployment.
b. Worker turnover.
c. Worker effort.
d. The quality of the company's personnel.

3. To determine the natural level of production, it is necessary to know:

a. The aggregate demand curve.
b. The aggregate supply curve.
c. The Price level.
d. All the above options

4. The aggregate supply relationship indicates that an increase in output causes an

increase in the price level. Which of the following statements best explains why?
As output increases....

a. firms are able to sell more goods and therefore increase their prices, raising
the price level.
b. employment increases, which causes nominal wages to increase, raising the
price level.
c. the government increases taxes, raising costs for firms and thus the price level.
d. income increases, and aggregate demand increases, raising the price level.

5. Which of the following statements is correct?

a. To maximize profits, firms set the wage at the level where workers are
indifferent to work or not to work.
b. Firms aim to set the highest possible price.
c. In equilibrium, the wage squeezes the labor market, so there is no
unemployment.
d. If all firms set the same price and pay the same nominal wage, then the higher
the real wage they pay, the lower the markup on costs.
Reasoning questions and practical exercises

1. Calculate the participation, employment and unemployment rates for the following
economies:

Noruega España
Number of persons, millions
Population of working age 3.5 37.6
Labour force 2.5 21.6
Out of labour force (inactive) 1.0 16.0
Employed 2.4 18.1
Unemployed 0.1 3.5
Rates (%)
Participation rate
Employment rate
Unemployment rate

2. You are given the following information for a country: Participation rate = 75%,
Unemployment rate = 10%, Employment rate = 67.5% and Number of employed = 27
million. Based on this information, which of the following is correct?
a. The working age population is 30 million.
b. The size of the labour force is 40 million.
c. The number of unemployed is 3 million.
d. The unemployment rate is 12%.