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SN_21: Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations True or False

1. Economic growth means a growth in real, per capita total output over time. 2. Individuals, because they may differ considerably in their evaluation of the relative importance of certain issues, may disagree about whether certain so-called problems are really problems after all. 3. Economic growth is considered to be positive by all individuals. 4. Other things being equal, relatively high rates of unemployment are almost universally viewed as bad. 5. The unemployment rate is the number of people officially unemployed divided by a countrys population aged 16 or over. 6. The civilian labor force figure excludes those in the armed services, prison, and mental hospitals, as well homemakers, retirees, and full-time students because they are not considered currently available for employment. 7. By far, the worst employment downturn in U.S. history was the Great Depression. 8. Before 1960, variations in unemployment tended to be more pronounced than since 1960. 9. Discouraged workers, who have not actively sought work for four weeks, are counted as unemployed. 10. People looking for full-time work who grudgingly settle for a part-time job are counted as employed, even though they are only partly employed. 11. Some people working in the underground economy may be counted in labor statistics as unemployed, while others may be counted as not in the labor force. 12. Unemployment rates are usually similar across different segments of the population, but they vary substantially over time. 13. In the short run, a reduction in unemployment may come at the expense of a higher rate of inflation. 14. The duration of unemployment tends to be greater when the amount of unemployment is low and smaller when the amount of unemployment is high. 15. Unemployment means a loss of potential output. 16. When the baby-boom generation began entering the labor force, it raised the labor force participation rate. 17. Frictional unemployment results from persons being temporarily between jobs. 18. Frictional unemployment, while not good in itself, is a by-product of a healthy phenomenon; and because it is short lived, it is not generally viewed as a serious problem. 19. Structural employment can arise because jobs that require particular skills disappear. 20. Structural unemployment is easily measured and stable over time. 21. Cyclical unemployment may result from an insufficient level of demand for goods and services. 22. Given the volatility and dimensions of unemployment, governments view it as the result of inadequate demand, which is especially correctable through government policies.

23. The natural rate of unemployment roughly equals the sum of frictional and cyclical unemployment when they are at a maximum. 24. When unemployment rises above the natural rate, it reflects the existence of cyclical unemployment. 25. The natural rate of unemployment does not change over time. 26. At the natural rate of unemployment, the economy is producing its potential output. 27. When the economy is experiencing cyclical unemployment, the unemployment rate is less than the natural rate. 28. In both inflation and deflation, a countrys unit of currency changes in purchasing power. 29. Unanticipated and sharp price changes are almost universally considered to be a bad thing that needs to be remedied by some policy. 30. Debtors lose from inflation. 31. Wage earners will lose from inflation if wages rise at a slower rate than the price level. 32. Uncertainty about inflation can increase long-term interest rates by adding an inflation risk premium. 33. Inflation brings about changes in real incomes of persons. 34. Menu costs and shoe-leather costs are modest, regardless of the rate of inflation. 35. The real interest rate equals the nominal interest rate plus the inflation rate. 36. When the inflation rate exceeds the nominal interest rate, real interest rates are negative. 37. As long as nominal interest rates cannot be negative, real interest rates cannot be negative. 38. If people correctly anticipate inflation, they will behave in a manner that will largely protect them against loss. 39. When people start expecting future inflation, creditors become less willing to lend funds at any given interest rate because they fear they will be repaid in dollars of lesser value than those they loaned. 40. When borrowers of funds start expecting future inflation, the demand for funds decreases. 41. When both suppliers and demanders of funds begin to expect inflation, it will push up the interest rate to a new, higher equilibrium level. 42. In periods of high unexpected inflation, the nominal interest rate can be high while the real interest rate is low or even negative. 43. In a growing economy, real GDP will tend to rise from one business cycle peak to the next. 44. In an expansion, investment is rising, but expenditures for expensive durable consumer goods are falling. 45. A contraction is a period of falling real output and is usually accompanied by rising unemployment and declining business and consumer confidence. 46. Unemployment falls substantially as soon as the economy enters the expansion phase of the business cycle. 47. The lengths of business cycles are not uniform. 48. The performance of the economy and the fate of an incumbents bid for reelection show a strong correlation. 49. Econometric forecasts are generally highly accurate.

50. Since the development of the index of leading economic indicators, it has never failed to give some warning of an economic downturn. 51. The lead time between a change in the index of economic indicators and changes in business conditions has varied widely.

Multiple Choice Questions


1. Which is not one of societys major economic goals? a. maintaining employment at high levels b. maintaining prices at a stable level c. maintaining a high rate of economic growth d. All of the above are major economic goals of society. 2. With regard to macroeconomic goals, which is not true? a. Individuals differ considerably in their evaluation of the relative importance of certain issues. b. Individuals disagree on whether certain problems are really problems. c. Virtually everyone views economic growth positively. d. Some individuals disagree about the appropriate distribution of income. e. All of the above are true. 3. High rates of unemployment a. can lead to increased tensions and despair. b. result in the loss of some potential output in society. c. reduce the possible level of consumption in society. d. represent a loss of efficiency in society. e. All of the above are true. 4. The labor force consists of a. discouraged workers, employed workers, and those actively seeking work. b. all persons over the age of 16 who are working or actively seeking work. c. all persons over the age of 16 who are able to work. d. all persons over the age of 16 who are working, plus those not working. e. discouraged workers, part-time workers, and full-time workers. 5. Discouraged workers a. are considered unemployed. b. are considered as not in the labor force. c. are considered as in the labor force. d. are considered as both unemployed and in the labor force. e. are considered as unemployed but not in the labor force. 6. The largest fraction of those counted as unemployed is due to a. job losers. b. job leavers. c. new entrants. d. reentrants. 7. The official unemployment rate may overstate the extent of unemployment because a. it excludes discouraged workers. b. it counts part-time workers as fully employed. c. it does not count those with jobs in the underground economy as employed. d. it includes those who claim to be looking for work as unemployed, even if they are just going through the motions in order to get government benefits. e. of both c and d.

8. If unemployment benefits increase, leading more people to claim to be seeking work when they are not really seeking work, the measured unemployment rate will a. rise. b. fall. c. be unaffected. d. change in an indeterminate direction. 9. Persons who do not have jobs and who do not look for work are considered a. unemployed. b. out of the labor force. c. underemployed. d. overemployed. e. part of the underground economy. 10. According to the Bureau of Labor Statistics, the four main categories of unemployed workers are a. discouraged workers, part-time workers, the cyclically unemployed, and the frictionally unemployed. b. discouraged workers, job losers, new entrants, and the underemployed. c. new entrants, job losers, job leavers, and reentrants. d. job losers, job leavers, the structurally unemployed, and the frictionally unemployed. 11. Unemployment caused by a contraction in the economy is called a. frictional unemployment. b. cyclical unemployment. c. structural unemployment. d. seasonal unemployment. 12. When unemployment rises above the natural rate, it reflects the existence of ___________________ unemployment. a. frictional b. structural c. seasonal d. cyclical 13. The natural rate of unemployment would increase when which of the following increases? a. frictional unemployment b. structural unemployment c. cyclical unemployment d. any of the above e. either frictional or structural unemployment 14. Which of the following is false? a. At the natural rate of unemployment, the economy is considered to be at full employment. b. At full employment, the economy is producing at its potential output. c. If unemployment is greater than its natural rate, the economy is producing at greater than its potential output. d. If we are at less than full employment, some cyclical unemployment exists.

15. Inflation can harm a. retirees on fixed pensions. b. borrowers who have long-term fixed interest rate loans. c. wage earners whose incomes grow slower than inflation. d. either a or c. e. all of the above. 16. Unexpected inflation generally benefits a. lenders. b. borrowers. c. the poor. d. people on fixed incomes. 17. If the nominal interest rate is 9 percent and the inflation rate is 3 percent, the real interest rate is a. 3 percent. b. 6 percent. c. 9 percent. d. 12 percent. e. 27 percent. 18. If people correctly anticipate inflation, it will a. benefit borrowers. b. benefit lenders. c. benefit neither borrowers nor lenders. d. harm both borrowers and lenders. 19. A business cycle reflects changes in economic activity, particularly real GDP. The stages of a business cycle in order are a. expansion, peak, contraction, and trough. b. expansion, trough, contraction, and peak. c. contraction, recession, expansion, and boom. d. trough, expansion, contraction, and peak. 20. The contractionary phase of the business cycle is characterized by a. reduced output and increased unemployment. b. reduced output and reduced unemployment. c. increased output and increased unemployment. d. increased output and reduced unemployment.

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