Deck 9: Business Cycles, Unemployment, and Inflation

Question 1

Most economists agree that the immediate cause of most business cycle variation is

A) an unexpected change in the productivity of workers.
B) an unexpected change in the level of total spending.
C) the invention of new products.
D) the growth and subsequent bursting of financial bubbles.

Answer 1

an unexpected change in the level of total spending.

Question 2

The production of durable goods varies more than the production of nondurable goods because

A) purchases of durable goods are not postponable.
B) purchases of durable goods are postponable.
C) the producers of nondurable goods have monopoly power.
D) producers of durable goods are highly competitive.

Answer 2

purchases of durable goods are postponable.

Question 3

The phase of the business cycle in which real GDP declines is called

A) the peak.
B) an expansion.
C) a recession.
D) the trough.

Answer 3

a recession.

Question 4

In the United States, business cycles have occurred against a backdrop of a long-run trend of

A) declining unemployment.
B) stagnant productivity growth.
C) rising real GDP.
D) rising inflation.

Question 5

Innovations such as the microchip and the Internet lead to business cycle variations because

A) they cause prices to be sticky.
B) significant innovations occur irregularly and unexpectedly.
C) the central bank will often change the money supply in response.
D) they cause prices to be flexible.

Question 6

During a severe recession, we would expect output to fall the most in

A) the health care industry.
B) the clothing industry.
C) agriculture.
D) the construction industry.

Question 7

$$\begin{array} { | l | r | } \hline \text { Unemployed } & 7 \\\hline \text { Total Population } & 145 \\\hline \text { Employed } & 95 \\\hline \text { Discouraged Workers } & 3 \\\hline\end{array}$$ The table contains information about the hypothetical economy of Scoob. All ?gures are in millions. The labor force in Scoob is

A) 95 million.
B) 102 million.
C) 105 million.
D) 145 million.

Question 8

Which of the following would most likely move the economy into a recession in the short term?

A) invention of a new product that most consumers want to buy
B) innovations in management that enhance worker productivity
C) the central bank printing less money than was anticipated
D) Congress passing a reduction in personal income tax rates

Question 9

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are

A) military goods and capital goods.
B) services and nondurable consumer goods.
C) clothing and education.
D) capital goods and durable consumer goods.

Question 10

What is the primary reason that changes in total spending lead to cyclical changes in output and employment?

A) Government is unable to respond by changing the amount of money in circulation.
B) Changes in total spending cause supply shocks that cause cyclical variation.
C) Prices are sticky in the short run.
D) Prices are flexible in the long run.

Question 11

In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?

A) military goods
B) capital goods
C) textile products
D) agricultural commodities

Question 12

An unexpected increase in total spending will cause an increase in GDP

A) if prices are sticky.
B) if prices are fully flexible.
C) regardless of whether prices are sticky or fully flexible.
D) only if prices are stuck in the long term.

Question 13

Recurring upswings and downswings in an economy's real GDP over time are called

A) recessions.
B) business cycles.
C) output yo-yos.
D) total product oscillations.

Question 14

As it relates to economic growth, the term long-run trend refers to

A) the long-run increase in the relative importance of durable goods in the U.S. economy.
B) the long-term expansion or contraction of business activity that occurs over many years.
C) fluctuations in business activity that average 40 months in duration.
D) fluctuations in business activity that occur around Christmas, Easter, and other major holidays.

Question 15

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

A) expansion
B) recession
C) peak
D) trough

Question 16

Which of the following statements is true about causes of business cycle fluctuations?

A) Economists all agree that supply shocks are the cause of most business cycle fluctuations.
B) Economists all agree that productivity shocks are the cause of most business cycle changes.
C) Economists all agree that monetary changes are primarily responsible for business cycle fluctuations.
D) There are a wide range of theories as to the underlying causes of business cycle movements.

Question 17

A recession is defined as a period in which

A) cost-push inflation is present.
B) nominal domestic output falls.
C) demand-pull inflation is present.
D) real domestic output falls.

Question 18

The phase of the business cycle in which real GDP is at a minimum is called

A) the peak.
B) a recession.
C) the trough.
D) the underside.

Question 19

Which of the following is not seen by economists as an underlying cause of business cycle fluctuations?

A) unexpected financial bubbles that eventually burst
B) shocks to the money supply by the nation's central bank
C) supply shocks caused by major innovations
D) All of these are identified as causes of business cycle changes.

Question 20

Most economists agree that the immediate determinant of the volume of output and employment is the

A) composition of consumer spending.
B) ratio of public goods to private goods production.
C) level of total spending.
D) size of the labor force.

Question 21

If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the

A) frictional unemployment rate is 5 percent.
B) cyclical unemployment rate and the frictional unemployment rate together are 5 percent.
C) cyclical unemployment rate is 4 percent.
D) natural rate of unemployment will eventually increase.

Question 22

The natural rate of unemployment is

A) higher than the full-employment rate of unemployment.
B) lower than the full-employment rate of unemployment.
C) that rate of unemployment occurring when the economy is at its potential output.
D) found by dividing total unemployment by the size of the labor force.

Question 23

The unemployment rate is the

A) ratio of unemployed to employed workers.
B) number of employed workers minus the number of workers who are not in the labor force.
C) percentage of the labor force that is unemployed.
D) percentage of the total population that is unemployed.

Question 24

In the United States, the rate of unemployment is highest for

A) white teenagers.
B) African-American teenagers.
C) married women.
D) unmarried women.

Question 25

$$\begin{array} { | l | r | } \hline \text { Unemployed } & 7 \\\hline \text { Total Population } & 145 \\\hline \text { Employed } & 95 \\\hline \text { Discouraged Workers } & 3 \\\hline\end{array}$$ The table contains information about the hypothetical economy of Scoob. All ?gures are in millions. The unemployment rate in Scoob is

A) 2.5 percent.
B) 3.2 percent.
C) 5.0 percent.
D) 6.9 percent.

Question 26

Kara voluntarily quit her job as an insurance agent to return to school full time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kara presently is

A) cyclically unemployed.
B) structurally unemployed.
C) frictionally unemployed.
D) not a member of the labor force.

Question 27

The presence of discouraged workers

A) increases the size of the labor force but does not affect the unemployment rate.
B) reduces the size of the labor force but does not affect the unemployment rate.
C) may cause the official unemployment rate to understate the true amount of unemployment.
D) may cause the official unemployment rate to overstate the true amount of unemployment.

Question 28

Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is

A) 3 percent.
B) 6 percent.
C) 7 percent.
D) 53 percent.

Question 29

According to the Bureau of Labor Statistics, to be officially unemployed a person must

A) be in the labor force.
B) be 21 years of age or older.
C) have lost a job.
D) be waiting to be called back from a layoff.

Question 30

Official unemployment statistics

A) understate unemployment because individuals receiving unemployment compensation are counted as employed.
B) understate unemployment because discouraged workers are not counted as unemployed.
C) include cyclical and structural unemployment but not frictional unemployment.
D) overstate unemployment because workers who are involuntarily working part time are counted as being employed.

Question 31

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is

A) unemployed.
B) employed.
C) not in the labor force.
D) in the labor force.

Question 32

Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job in two weeks with company B. Kyle will be considered as

A) cyclically unemployed.
B) frictionally unemployed.
C) structurally unemployed.
D) employed.

Question 33

Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon, where she anticipates that a new job will be
Available. We can say that Susie is faced with

A) seasonal unemployment.
B) cyclical unemployment.
C) structural unemployment.
D) frictional unemployment.

Question 34

The natural rate of unemployment is the

A) unemployment rate experienced at the depth of a depression.
B) full-employment unemployment rate.
C) unemployment rate experienced by the least-skilled workers in the economy.
D) unemployment rate experienced by the most-skilled workers in the economy.

Question 35

The unemployment rate of

A) women greatly exceeds that of men.
B) whites is roughly equal to that of African Americans.
C) managerial and professional workers exceeds that of construction and extraction workers.
D) teenagers is much higher than that of adults.

Question 36

$$\begin{array} { | l | r | } \hline \text { Unemployed } & 7 \\\hline \text { Total Population } & 145 \\\hline \text { Employed } & 95 \\\hline \text { Discouraged Workers } & 3 \\\hline\end{array}$$ The table contains information about the hypothetical economy of Scoob. All ?gures are in millions. If the natural rate of unemployment in Scoob is 5 percent, then

A) structural unemployment is about 3 percent.
B) frictional unemployment is about 2 percent.
C) cyclical unemployment is about 2 percent.
D) hidden unemployment is about 5 percent.

Question 37

The labor force includes

A) employed workers and persons who are officially unemployed.
B) employed workers but excludes persons who are officially unemployed.
C) full-time workers but excludes part-time workers.
D) permanent employees but excludes temporary employees.

Question 38

Part-time workers who want full-time work are counted as

A) unemployed, and therefore the official unemployment rate may overstate the level of unemployment.
B) unemployed, and therefore the official unemployment rate may understate the level of unemployment.
C) fully employed, and therefore the official unemployment rate may overstate the level of unemployment.
D) fully employed, and therefore the official unemployment rate may understate the level of unemployment.

Question 39

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this,
All else equal, the official unemployment rate would

A) decline.
B) increase.
C) increase in the short run but eventually decline.
D) be unchanged.

Question 40

The United States' economy is considered to be at full employment when

A) about 5 to 6 percent of the total population is unemployed.
B) 90 percent of the labor force is employed.
C) about 4 to 5 percent of the labor force is unemployed.
D) 100 percent of the labor force is employed.

Question 41

Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called

A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) compositional unemployment.

Question 42

A college graduate using the summer following graduation to search for a job would best be classified as

A) not officially a member of the labor force.
B) structurally unemployed.
C) cyclically unemployed.
D) frictionally unemployed.

Question 43

Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as

A) structurally unemployed.
B) frictionally unemployed.
C) not in the labor force.
D) employed.

Question 44

The type of unemployment associated with recessions is called

A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) seasonal unemployment.

Question 45

A large negative GDP gap implies

A) an excess of imports over exports.
B) a low rate of unemployment.
C) a high rate of unemployment.
D) a sharply rising price level.

Question 46

In the depth of the Great Depression, the unemployment rate in the United States was about

A) 15 percent.
B) 33 percent.
C) 25 percent.
D) 40 percent.

Question 47

The GDP gap measures the difference between

A) NDP and GDP.
B) NI and PI.
C) actual GDP and potential GDP.
D) nominal GDP and real GDP.

Question 48

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result,

A) the official unemployment rate will fall.
B) the official unemployment rate will rise.
C) the official unemployment rate will remain unchanged.
D) the size of the labor force will increase.

Question 49

Which of the following is correct?

A) During the Great Recession, unemployment rates for men rose above those of women.
B) Unemployment rates for African-American and White workers are approximately the same.
C) Teenagers experience approximately the same unemployment rates as do adults.
D) Laborers are less vulnerable to unemployment than are professional workers.

Question 50

Cyclical unemployment results from

A) a deficiency of spending on goods and services.
B) the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy.
C) the everyday dynamics of a free labor market, with workers voluntarily changing jobs.
D) technological change.

Question 51

At the economy's natural rate of unemployment,

A) the economy achieves its potential output.
B) there is only a relatively small amount of cyclical unemployment.
C) only frictional unemployment exists.
D) only structural unemployment exists.

Question 52

Search unemployment is a type of

A) cyclical unemployment.
B) hidden unemployment.
C) frictional unemployment.
D) structural unemployment.

Question 53

The aggregate cost of unemployment can be measured by the

A) amount by which actual GDP exceeds potential GDP.
B) amount by which potential GDP exceeds actual GDP.
C) excess of real GDP over nominal GDP.
D) excess of nominal GDP over real GDP.

Question 54

Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?

A) search unemployment
B) wait unemployment
C) cyclical unemployment
D) frictional unemployment

Question 55

Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?

A) frictional and cyclical unemployment
B) structural and frictional unemployment
C) cyclical and structural unemployment
D) frictional, structural, and cyclical unemployment

Question 56

The government agency responsible for collecting and reporting unemployment data is the

A) Bureau of Labor Statistics.
B) Bureau of Unemployment.
C) Bureau of Economic Analysis.
D) Bureau of Economic Research.

Question 57

$$\begin{array} { | l | c | } \hline \text { Full-time Employed } & 80 \\\hline \text { Part-time Employed } & 25 \\\hline \text { Unemployed } & 15 \\\hline \text { Discouraged Workers } & 5 \\\hline \text { Members of Underground Economy } & 6 \\\hline \text { Consumer Price Index } & 110 \\\hline\end{array}$$ Refer to the given information about a hypothetical economy. If members of the underground economy are currently counted as part of the unemployed when in fact they are employed, the
O?cial unemployment rate is overstated by about

A) 0 percentage points.
B) 2 percentage points.
C) 5 percentage points.
D) 6 percentage points.

Question 58

$$\begin{array} { | l | r | } \hline \text { Full-time Employed } & 80 \\\hline \text { Part-time Employed } & 25 \\\hline \text { Unemployed } & 15 \\\hline \text { Discouraged Workers } & 5 \\\hline \text { Members of Underground Economy } & 6 \\\hline \text { Consumer Price Index } & 110 \\\hline\end{array}$$ Refer to the given information about a hypothetical economy. The unemployment rate is

A) 18.8 percent.
B) 12.5 percent.
C) 16.7 percent.
D) 25 percent.

Question 59

Structural unemployment

A) is also known as frictional unemployment.
B) is the main component of cyclical unemployment.
C) is said to occur when people are waiting to be called back to previous jobs.
D) may involve a locational mismatch between unemployed workers and job openings.

Question 60

$$\begin{array} { | l | r | } \hline \text { Full-time Employed } & 80 \\\hline \text { Part-time Employed } & 25 \\\hline \text { Unemployed } & 15 \\\hline \text { Discouraged Workers } & 5 \\\hline \text { Members of Underground Economy } & 6 \\\hline \text { Consumer Price Index } & 110 \\\hline\end{array}$$ Refer to the given information about a hypothetical economy. The rate of in?ation

A) is 110 percent.
B) is 10 percent.
C) is 0 percent.
D) cannot be determined from the data.

Question 61

If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is

A) $360 billion.
B) $660 billion.
C) $320 billion.
D) $20 billion.

Question 62

Okun's law

A) measures the trade-off between the rate of inflation and the rate of unemployment.
B) indicates the number of years it will take for a constant rate of inflation to double the price level.
C) quantifies the relationship between nominal and real incomes.
D) shows the relationship between the unemployment rate and the size of the negative GDP gap.

Question 63

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is

A) 11 percent.
B) 33 percent.
C) 91 percent.
D) 10 percent.

Question 64

The relationship between the size of the negative GDP gap and the unemployment rate is

A) direct.
B) inverse.
C) undefined.
D) direct during recession but inverse during expansion.

Question 65

The annual rate of inflation can be found by subtracting

A) the real income from the nominal income.
B) last year's price index from this year's price index.
C) this year's price index from last year's price index and dividing the difference by this year's price index.
D) last year's price index from this year's price index and dividing the difference by last year's price index.

Question 66

$$\begin{array} { | l | c | } \hline \text { Potential Real GDP } & \$ 200 \text { Billion } \\\hline \text { Natural Rate of Unemployment } & 6 \% \\\hline \text { Actual Rate of Unemployment } & 12 \% \\\hline\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. The size of the negative GDP gap as a percentage of potential GDP for the
Economy is

A) 6 percent.
B) 9 percent.
C) 12 percent.
D) 15 percent.

Question 67

If actual GDP is less than potential GDP,

A) potential GDP will fall.
B) the price level will rise.
C) investment spending will fall.
D) the actual unemployment rate will be higher than the natural unemployment rate.

Question 68

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is

A) $510 billion.
B) $490 billion.
C) $10 billion.
D) $990 billion.

Question 69

$$\begin{array} { | l | c | } \hline \text { Potential Real GDP } & \$ 200 \text { Billion } \\\hline \text { Natural Rate of Unemployment } & 6 \% \\\hline \text { Actual Rate of Unemployment } & 12 \% \\\hline\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. If the unemployment rate in the economy fell to 6 percent, we could
Conclude that

A) only structural unemployment remained.
B) the economy's production possibilities curve shifted outward.
C) the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.
D) nominal GDP would rise, but real GDP would fall.

Question 70

As applied to the price level, the "rule of 70" indicates that the number of years required for the price level to double can be found by

A) dividing 70 into the annual rate of inflation.
B) dividing the annual rate of inflation into 70.
C) subtracting the annual change in nominal incomes from 70.
D) multiplying the annual rate of inflation by 70.

Question 71

$$\begin{array} { | l | c | } \hline \text { Potential Real GDP } & \$ 200 \text { Billion } \\\hline \text { Natural Rate of Unemployment } & 6 \% \\\hline \text { Actual Rate of Unemployment } & 12 \% \\\hline\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. The amount of output being forgone by the economy is

A) $12 billion.
B) $15 billion.
C) $18 billion.
D) $24 billion.

Question 72

For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of

A) Taylor's rule.
B) Okun's law.
C) Say's law.
D) the Coase theorem.

Question 73

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, actual GDP is

A) $415 billion.
B) $385 billion.
C) $15 billion.
D) $785 billion.

Question 74

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced

A) inflation of 4 percent.
B) inflation of 3.33 percent.
C) deflation of 3.33 percent.
D) deflation of 4 percent.

Question 75

If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, actual GDP is

A) $300 billion.
B) $30 billion.
C) $360 billion.
D) $630 billion.

Question 76

Full-employment output is also called

A) zero-unemployment output.
B) equilibrium output.
C) potential output.
D) zero-savings output.

Question 77

Inflation means that

A) all prices are rising, but at different rates.
B) all prices are rising at approximately the same rate.
C) prices on average are rising, although some particular prices may be falling.
D) real incomes are rising.

Question 78

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of
Potential GDP is

A) 4 percent.
B) 8 percent.
C) 10 percent.
D) 2 percent.

Question 79

The consumer price index was 177.1 last year and 179.9 this year. Therefore, the current rate of inflation is about

A) 2.8 percent.
B) 3.4 percent.
C) 1.6 percent.
D) 4.1 percent.

Question 80

Unemployment rates in industrialized nations

A) all exceeded 10 percent at some point during the Great Recession.
B) vary considerably from each other.
C) tend to be about the same in each country and move together over time.
D) are less subject to business cycle fluctuations than in non-industrialized countries.