Deck 8: Potential Gdp and the Natural Unemployment Rate

Question 1

An efficiency wage

A)increases the supply of labor and therefore increases potential GDP.
B)is set below the equilibrium real wage rate to reduce labor costs.
C)reduces frictional unemployment.
D)is set above the equilibrium real wage rate to induce greater work effort.
E)increases the demand for labor and therefore increases potential GDP.

Answer 1

D

Question 2

The table above gives the labor market for a small foreign economy.

- Equilibrium in the labor market occurs at a real wage rate of

A)$7.65 per hour.
B)$9.00 per hour.
C)$7.15 per hour.
D)$8.00 per hour.
E)$8.50 per hour.

Answer 2

$8.00 per hour.

Question 3

The natural unemployment rate is the result of

A)insufficient demand for labor.
B)bad government policies.
C)the Okun Gap.
D)job search and job rationing.
E)the Lucas Wedge.

Answer 3

D

Question 4

The labor force participation rate

A)increases as the real wage increases.
B)increases as the opportunity cost of working increases.
C)has nothing to do with the real wage rate.
D)decreases as the real wage increases.
E)is one of the major reasons that firms pay efficiency wages.

Question 5

According to the above table, if the minimum wage is set at $20 per hour, then

A)the labor supply curve will shift until $20 is the new equilibrium real wage rate.
B)there is an excess demand for labor.
C)the quantity of labor supplied exceeds the quantity of labor demanded by 50 million hours per month.
D)the labor demand curve will shift until $20 is the new equilibrium real wage rate.
E)the quantity of labor demanded will increase until it is equal to the quantity of labor supplied.

Question 6

The amount of real GDP produced at any one time depends on i)a fixed amount of capital.
Ii)a fixed level of technology.
Iii)decisions people make about leisure versus working.

A)i, ii and iii
B)i and ii
C)i only
D)ii only
E)ii and iii

Question 7

The more generous the amount of unemployment benefits, the

A)shorter the time spent searching until accepting a suitable job.
B)lower the natural unemployment rate.
C)lower the opportunity cost of job search.
D)higher the opportunity cost of job search.
E)shorter the time spent searching for a suitable job and the higher the opportunity cost of being unemployed.

Question 8

Over the business cycle, real GDP fluctuates around

A)potential GDP.
B)the business cycle peak.
C)nominal GDP.
D)the business cycle trough.
E)the Lucas Wedge.

Question 9

Potential GDP is the level of

A)GDP that fluctuates around actual GDP.
B)GDP that would be produced if all workers were fully employed and there was no unemployment.
C)GDP that is impossible to achieve.
D)nominal GDP that is smaller than the real GDP.
E)real GDP that the economy could produce at full employment.

Question 10

An increase in the time spent on job search

A)decreases the unemployment rate.
B)decreases potential GDP.
C)decreases the labor force participation rate.
D)decreases the demand for labor.
E)decreases the real wage rate.

Question 11

According the Keynesian macroeconomic model, which of the following was responsible for Starting the Great Depression?

A)high taxes
B)decreases in technology
C)too little private spending
D)decreases in the quantity of money
E)too little government spending

Question 12

The supply of labor is defined as the relationship between the real wage rate and the

A)quantity of labor supplied by firms.
B)amount of jobs supplied by firms.
C)amount of jobs supplied by households.
D)equilibrium quantity of employment.
E)quantity of labor supplied by households.

Question 13

If the government increases unemployment benefits, then the equilibrium amount of employment_{-------------}and potential GDP_{-------------}.

A)does not change; does not change
B)increases; increases
C)increases; decreases
D)decreases; increases
E)decreases; decreases

Question 14

Potential GDP is

A)the level of output produced when the economy is fully employed.
B)shows that the Okun Gap vastly exceeds the Lucas Wedge.
C)the same as nominal GDP.
D)another name for the Lucas Wedge.
E)the same as real GDP.

Question 15

The quantity of labor demanded is the labor hours all

A)firms plan to hire at a given real wage rate.
B)firms plan to hire at a given nominal wage rate.
C)employees plan to work at a given real wage rate.
D)employees plan to work at a given nominal wage rate.
E)Both answers A and C are correct.

Question 16

As demonstrated by the labor supply schedule, the quantity of labor supplied depends on

A)the value of the dollar.
B)the amount of labor that firms want to hire.
C)the real wage.
D)the nominal wage.
E)workers' productivity.

Question 17

Which of the following is true?

A)Real GDP fluctuates around potential GDP.
B)Potential GDP fluctuates around nominal GDP.
C)Real GDP never equals potential GDP.
D)Nominal GDP fluctuates around real GDP.
E)The Okun Gaps are much larger than the Lucas Wedge.

Question 18

The Keynesian macroeconomic model states that

A)the economy is fairly stable.
B)fluctuations in the quantity of money are responsible for most economic recessions.
C)the economy is inherently unstable and government intervention is required to maintain continued economic growth.
D)changes in technology generate business cycles.
E)markets work efficiently to produce the best macroeconomic outcomes.

Question 19

Which of the following increases frictional and/or structural unemployment?
I. more young workers entering the labor force
Ii. more generous unemployment benefits
Iii. a structural slump with some industries dying

A)iii only
B)i, ii. and iii
C)ii only
D)i and ii
E)i only

Question 20

To increase workers' incomes, the City of New York's government set a wage below which it is illegal for employers to pay employees. This wage is referred to as the

A)government wage.
B)city wage.
C)minimum wage.
D)efficiency wage.
E)union wage.

Question 21

The Fair Labor Standards Act originally set the minimum wage at

A)$3.00 in 1960.
B)$1.25 in 1983.
C)$0.25 in 1983.
D)$1.25 in 1938.
E)$0.25 in 1938.

Question 22

The length of time people spend in search of a job increases if

A)the criteria necessary to qualify for unemployment benefits increases.
B)the minimum wage is decreased.
C)unemployment benefits increase.
D)the population ages.
E)there is a sudden change in technology.

Question 23

If the minimum wage is set

A)below the equilibrium wage rate, it will create unemployment.
B)equal to the equilibrium wage rate, it will create a shortage of labor.
C)above the equilibrium wage rate, it will create unemployment.
D)below the equilibrium wage rate, it will create a shortage of labor.
E)equal to the equilibrium wage rate, it will create a surplus of labor.

Question 24

The production function displays

A)normal returns.
B)average returns.
C)diminishing returns.
D)increasing returns.
E)real returns.

Question 25

The quantity of labor demanded definitely increases if the

A)real wage rate rises.
B)nominal wage rate falls.
C)supply of labor decreases.
D)real wage rate falls.
E)nominal wage rate rises.

Question 26

A country reports that its actual real GDP is greater than its potential GDP. It must be that

A)more workers decided to quit work in order to enjoy leisure time.
B)the excess by which real GDP exceeds potential GDP is only temporary and eventually real GDP will decrease to be equal to potential GDP.
C)an error was made when calculating actual real GDP.
D)the price level is increasing.
E)None of the above answers is correct because it is impossible for a country's real GDP to exceed its potential GDP.

Question 27

When all other influences on firms' hiring plans remain the same, the

A)lower the real wage rate, the greater is the quantity of labor demanded.
B)lower the real wage rate, the greater is the quantity of labor supplied
C)lower the real wage rate, the smaller is the quantity of labor demanded.
D)higher the real wage rate, the greater is the quantity of labor demanded.
E)None of the above answers is correct because firms' hiring decisions depend on how profitable hiring a worker is, which depends on how much added profit the worker can create.

Question 28

At full employment, actual_{-------------}equals_{-------------}

A)nominal GDP; potential GDP
B)potential GDP; nominal GDP
C)real GDP; potential GDP
D)unemployment; zero
E)real GDP; nominal GDP

Question 29

The figure above shows the U.S. production function.

-How would an increase in capital be shown in the figure?

A)a movement from point C to point B
B)an upward shift or rotation of the production function
C)a downward shift or rotation of the production function
D)a movement from point A to point B
E)None of the above because the effects of an increase in capital cannot be shown in the figure.

Question 30

Job rationing occurs when the real wage is _ the equilibrium level and there is a of labor.

A)above; surplus
B)below; surplus
C)equal to; shortage
D)below; shortage
E)above; shortage

Question 31

Which of the following ideas reflect the Monetarist macroeconomic model?
I)The Monetarist model supports the Classical model, in general.
Ii)Decreases in the growth rate of the quantity of money trigger recessions. iii)Government intervention is an appropriate tool to steady the economy.

A)ii and iii
B)i only
C)i and iii
D)i, ii and iii
E)i and ii

Question 32

As additional units of labor hours are employed, holding all other factors constant, along the production function,

A)real GDP increase at a constant rate.
B)real GDP increases at a decreasing rate.
C)nominal GDP decreases at an increasing rate.
D)real GDP increases at an increasing rate.
E)real GDP initially decreases and then starts to increase.

Question 33

Suppose Germany's economy is experiencing full employment. This means that, in Germany,

A)real GDP is greater than potential GDP.
B)real GDP is equal to potential GDP.
C)real GDP equals nominal GDP.
D)the unemployment rate is equal to zero.
E)potential GDP is greater than real GDP.

Question 34

If New Zealand is operating at potential GDP, which of the following is true?
i) New Zealand only has frictional and structural unemployment.
ii) There is no inflation in New Zealand.
iii) New Zealand has positive net exports.

A)i and ii
B)i only
C)i and iii
D)i, ii and iii
E)ii only

Question 35

Holding all other influences constant, the quantity of labor supplied in a given time period depends

A)directly on the real wage rate so that a higher real wage increases the quantity of labor supplied.
B)directly on the quantity of labor demanded.
C)inversely on the real wage rate so that a higher real wage decreases the quantity of labor supplied.
D)inversely on the quantity of labor demanded.
E)on the money wage rate not the real wage rate.

Question 36

The above figure that most accurately shows a production function is

A)Figure A.
B)Figure B.
C)Figure C.
D)Figure D.
E)Both Figure A and Figure B; Figure A for an economy with an excess of labor and Figure B for an economy with a shortage of labor.

Question 37

Potential GDP

A)is another name for real GDP.
B)can never be attained.
C)is the quantity of GDP produced when the economy is at full employment of all resources.
D)is another name for nominal GDP.
E)can never be exceeded.

Question 38

The quantity of labor demanded by a firm depends upon

A)the nominal wage rate not the real wage rate.
B)the real wage rate not the nominal wage rate.
C)both the real wage rate and the nominal wage rate.
D)neither the real wage rate nor the nominal wage rate.
E)either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing.

Question 39

The above figure shows a nation's production function.

-Point A is

A)unattainable given the state of the economy.
B)attainable if the economy is inefficient.
C)the labor market equilibrium quantity of employment and real GDP.
D)the maximum amount of real GDP the nation can produce.
E)attainable if the nation uses resources efficiently.

Question 40

The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a packet of bubble
Gum sells for $1.00, then

A)Joanne is creating a $2.00 per hour profit for the firm.
B)Joanne is creating a $2.00 per hour loss for the firm.
C)the Bubby Gum company should decrease the price of the bubble gum so it sells more and makes a larger profit.
D)the Bubby Gum company should pay Joanne more.
E)None of the above answers are correct because more information about Joanne's real wage is needed to decide what to do.

Question 41

Job search is defined as

A)saying you are looking for a job when you are actually not looking.
B)equivalent to job rationing.
C)the activity of looking for an acceptable, vacant job.
D)being paid an efficiency wage.
E)attending school to increase your employability.

Question 42

Which of the following statements is (are)true?
I. As the real wage rate increases, the household's income decreases, which influences people to
Work more hours.
Ii. As the real wage rate increases, the quantity of labor demanded increases.
Iii. As the real wage rate increases, the opportunity cost of not working increases.

A)i and iii
B)iii only
C)i only
D)i, ii, and iii
E)ii only

Question 43

If the amount paid as unemployment benefits decreases, the opportunity cost of job search

A)is not affected because unemployment benefits do not change job availability.
B)rises and people stay unemployed for a shorter time.
C)falls and people stay unemployed for a longer time.
D)rises and people would stay unemployed longer.
E)falls and people stay unemployed for a shorter time.

Question 44

Which of the following statement or statements are correct about potential GDP?
I. Actual real GDP equals potential GDP when the economy is at full employment.
Ii. Real GDP can be less than potential GDP.
Iii. When real GDP equals potential GDP, it also equals nominal GDP.

A)i, ii, and iii
B)i only
C)i and ii
D)ii and iii
E)ii only

Question 45

The minimum wage is a

A)possible cause of job rationing because it lowers wages below their equilibrium.
B)possible cause of job search because it lowers wages below their equilibrium.
C)government established highest wage that is legal to pay.
D)factor that decreases unemployment because fewer people search for work if the minimum wage is increased.
E)possible cause of job rationing because it raises wages above their equilibrium.

Question 46

According to the production function, as the quantity of labor employed increases, real GDP Increases

A)at a decreasing rate.
B)at a constant rate.
C)and then eventually decreases.
D)until it reaches potential GDP and then it no longer changes.
E)at an increasing rate.

Question 47

The_{-------------}describes the relationship between the amount of labor employed and real GDP.

A)production function
B)Okun Gap
C)production possibilities frontier
D)Lucas Wedge
E)inflation rate

Question 48

The Monetarist model expands the Keynesian model by proposing that

A)the government should lower taxes promote economic growth.
B)decreases in the quantity of money lead to higher interest rates.
C)markets should be left alone to determine the optimal outcome.
D)decreases in the growth rate of the quantity of money trigger expansions by controlling inflation.
E)decreases in tax rates generate higher consumption.

Question 49

A firm's demand for labor depends on the

A)nominal wage rate, which equals the real wage divided by the price level.
B)supply of labor.
C)nominal wage rate because it pays workers in dollars.
D)real wage rate, which equals the nominal wage divided by the hours worked.
E)real wage rate, which equals the nominal wage divided by the price level.

Question 50

The length of time an unemployed person searches for a job is likely to increase as

A)new technologies make workers more productive.
B)job rationing decreases.
C)the birth rate declines.
D)unemployment benefits become more generous.
E)the working age population gets older.

Question 51

Which of the following explain the natural rate of unemployment?
I)job search
Ii)the Okun Gap
Iii)the production function

A)iii only
B)i and iii
C)i and ii
D)i only
E)ii and iii

Question 52

The Classical macroeconomic model proposes that

A)government intervention is required to help the economy reach its potential.
B)socialism produces the most efficient economic outcomes for a society.
C)real GDP equals potential GDP as long as inflation equals zero.
D)changes in the quantity of money are critical in driving economic growth.
E)markets work efficiently to produce the best macroeconomic outcomes.

Question 53

With fixed quantities of capital, land, and entrepreneurship and fixed technology, the amount of real GDP produced increases when _{-------------}increases.
I. the quantity of labor employed ii. the inflation rate
Iii. the price level

A)i only
B)ii only
C)i, ii, and iii
D)ii and iii
E)iii only

Question 54

An increase in the wage rate_{-------------} the quantity of labor supplied and _{-------------}the quantity of
Labor demanded.

A)increases; decreases
B)decreases; decreases
C)increases; increases
D)does not change; decreases
E)decreases; increases

Question 55

Households increase the quantity of labor supplied when the

A)income tax rises because an increase in the income tax increases the demand for labor.
B)nominal wage rate falls because the opportunity cost of not working rises.
C)nominal wage rate rises because the real wage rate must also rise.
D)real wage rate rises because the opportunity cost of not working falls.
E)real wage rate rises because the opportunity cost of not working rises.

Question 56

The figure above shows the market for fast food restaurant employees in a college town in a small nation to the East. The local Taco Bell pays its workers $9 an hour. This wage rate is

A)designed reduce the unemployment rate.
B)an effort to increase the demand for labor.
C)an efficiency wage aimed at reducing employee turnover.
D)the actual equilibrium wage rate.
E)illegal because the equilibrium wage rate is $6 an hour.

Question 57

As long as an additional worker hired by a firm produces

A)more output than the real wage rate, the firm will hire that worker.
B)more output than the nominal wage rate, the firm will hire that worker.
C)less output than the real wage rate, the firm will hire that worker.
D)some output, the firm will hire that worker.
E)more output than the real wage rate, the firm will not hire that worker.

Question 58

The sustainable upper limit of real GDP is a level of GDP that is

A)potential GDP.
B)greater than potential GDP, but by how much greater is unknown and controversial.
C)less than potential GDP, but by how much less is unknown and controversial.
D)determined only by what is the full employment equilibrium in the labor market.
E)None of the above answers is correct because there is no sustainable upper limit to real GDP because real GDP can always be increased.

Question 59

The demand for labor reflects the point that the

A)lower the real wage rate, the greater the quantity of labor demanded.
B)nominal wage rate and not the real wage rate determines the quantity of labor demanded.
C)higher the real wage rate, the greater the quantity of labor demanded.
D)demand for labor depends on the supply of labor.
E)real wage rate does not effect the quantity demanded of labor.

Question 60

Firms hire more labor as long as

A)the real wage rate is greater than the additional output the labor produces.
B)the nominal wage rate is less than the real wage rate.
C)extra labor will produce more output.
D)the real wage rate is less than the additional output the labor produces.
E)the nominal wage rate exceeds the real wage rate.

Question 61

Suppose an economist stated that Brazil had achieved its potential GDP 2013. This would imply that at this level of real GDP, Brazil experienced

A)inflation equal to zero.
B)peak in its business cycle in 2013.
C)a negative Okun Gap.
D)full employment.
E)unemployment equal to zero.

Question 62

The quantity of labor supplied increases as the real wage rises because

A)the opportunity cost of working increases.
B)the quantity of labor demanded increases.
C)labor force participation decreases so that only serious workers are left in the labor force.
D)the opportunity cost of leisure rises.
E)higher real wages mean that nominal wages have increased.

Question 63

In the United States since 1960, the average unemployment rate was highest during the decade of the

A)2000s.
B)1960s.
C)1990s.
D)1980s.
E)1970s.

Question 64

The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she produce 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. Based on this information, the Bubby Gum company should

A)decrease Joanne's wage rate because she is paid too much.
B)keep Joanne because she creates a profit for the firm.
C)increase its demand for labor.
D)fire Joanne because she creates a loss for the firm.
E)None of the above answers are correct because more information about Joanne's real wage is needed to decide what to do.

Question 65

If the government raises income taxes, then the equilibrium amount of employment_{-------------}and potential GDP _{-------------}.

A)increases; decreases
B)decreases; increases
C)does not change; does not change
D)increases; increases
E)decreases; decreases

Question 66

The natural unemployment rate is higher if

A)there is a decrease in the working-age population.
B)unemployment benefits become more generous.
C)efficiency wages are lower.
D)many of the new jobs created require skills possessed by the available labor.
E)there are fewer two-income households.

Question 67

When the labor market is in equilibrium,
I. the quantity demanded of labor equals the quantity supplied.
Ii. there is full employment.
Iii. potential GDP is produced.

A)ii only
B)i, ii, and iii
C)i only
D)iii only
E)i and iii

Question 68

The supply of labor curve has a_{-------------}slope because as the real wage rate rises, _{-------------}

A)negative; households work more hours
B)negative; firms hire fewer workers
C)positive; firms offer more jobs
D)positive; the opportunity cost of leisure rises
E)positive; the opportunity cost of leisure falls

Question 69

Hershey Chocolate Factory pays a money wage rate equal to $30 per hour and sells its candy bars
For $1.50 each. Hershey Chocolate Factory should hire labor until an additional unit of labor
Produces candy bars an hour.

A)10
B)45
C)30
D)1.5
E)20

Question 70

Data indicate that the natural unemployment rate in Canada is typically 3 percentage points higher than the U.S. natural unemployment rate. This difference is most likely the result of differences in

A)the value of the currency.
B)natural climate.
C)more structural change in the United States.
D)population.
E)unemployment benefits.

Question 71

A surplus in the labor market indicates that the

A)real wage rate is less than the equilibrium wage rate.
B)real wage rate is above the equilibrium wage rate but it is too low to eliminate the surplus of labor.
C)real wage rate has to rise before the labor market will reach equilibrium.
D)workers are not looking for work because they enjoy their leisure time.
E)quantity of labor demanded is less than the quantity of labor supplied.

Question 72

Suppose the full-employment equilibrium real wage rate is $11 per hour while the actual real wage rate is $12 per hour. If the actual real wage rate does not change, then

A)job rationing will occur.
B)job search will decline.
C)job rationing will decrease.
D)the production function will shift downward.
E)a positive Okun Gap will occur.

Question 73

During a business cycle recession, it is very likely that real GDP will

A)be greater than potential GDP.
B)equal nominal GDP and equal potential GDP.
C)exceed nominal GDP.
D)be less than potential GDP.
E)equal nominal GDP but not equal potential GDP.

Question 74

Suppose that Australia has fully employed all of its resources. This situation means that Australia

A)is operating at its potential GDP.
B)has a negative Okun Gap.
C)has a positive Lucas Wedge.
D)is growing at a faster rate than the United States.
E)is experiencing zero unemployment.

Question 75

The real wage rate is the_{-------------}divided by the_{-------------}

A)equilibrium quantity of employment; potential GDP
B)quantity of labor supplied; quantity of labor demanded
C)nominal wage rate; price level
D)quantity of labor demanded; quantity of labor supplied
E)nominal wage rate; inflation rate

Question 76

Which of the following statements is true?

A)According to the labor supply curve, as the real wage rises, workers are willing to provide more hours of labor.
B)According to the labor supply curve, as the real wage rises, employers are willing to provide fewer jobs.
C)According to the labor supply curve, as the real wage rises, employers are willing to provide more jobs.
D)According to the labor supply curve, as the real wage rises, workers are willing to provide fewer hours of labor.
E)According to the labor supply curve, as the real wage rises, more workers leave the labor force.

Question 77

A reason a nation faces diminishing returns along a production function is because

A)full employment is not possible.
B)the quantity of physical capital is fixed.
C)potential GDP is fixed.
D)unemployment always exists.
E)the wage rate is fixed while moving along the production function.

Question 78

Efficiency wages, above equilibrium minimum wage rates, and higher union wages are likely to

A)increase cyclical unemployment.
B)increase the natural unemployment rate.
C)reduce the equilibrium real wage rate.
D)decrease the natural unemployment rate.
E)increase the equilibrium real wage rate.

Question 79

At any given time, which factor of production is NOT fixed?

A)entrepreneurship
B)money
C)labor
D)land
E)technology

Question 80

In a labor market without an efficiency wage, minimum wage, or union wage, when the real wage rate exceeds the equilibrium real wage rate, there is a _{-------------} of labor and the real wage rate will_{-------------}
.

A)surplus; rise
B)shortage; fall
C)surplus; not change because only efficiency wages or union wages can change.
D)shortage; rise
E)surplus; fall