Deck 8: Economic Fluctuations, Unemployment, and Inflation

Question 1

Full employment

A) exists when everyone in the economy has a job
B) exists when everyone who wants a job has one
C) exists when the unemployment rate is zero
D) exists when everyone in the labor force has a job
E) will always include some unemployment

Answer 1

will always include some unemployment

Question 2

Economists use the phrase "business cycle" when referring to fluctuations in

A) the rate of real output and employment.
B) interest rates.
C) the consumer price index.
D) the general level of prices.

Answer 2

the rate of real output and employment.

Question 3

If the economy were at its potential output level, which of the following is not true?

A) The actual unemployment rate would equal the natural rate.
B) There would be some cyclical unemployment.
C) There would be some frictional unemployment.
D) There would be some structural unemployment.

Answer 3

There would be some cyclical unemployment.

Question 4

The recessionary phase of the business cycle is characterized by

A) decreasing real output and increasing unemployment.
B) decreasing real output and declining unemployment.
C) increasing real output and increasing unemployment.
D) increasing real output and declining unemployment.

Question 5

Which of the following will most likely occur during the expansionary phase of a business cycle?

A) Real GDP rises, and unemployment falls.
B) Real GDP declines, and inflation rises.
C) Interest rates rise, and the number of business failures rise.
D) Inflation rises, and employment falls.

Question 6

The period of declining growth in real GDP between the peak of the business cycle and the trough is called the

A) contractionary phase.
B) boom.
C) expansionary phase.
D) stationary phase.

Question 7

The difference between actual real GDP and potential GDP

A) decreases as the unemployment rate rises.
B) increases as the unemployment rate rises.
C) increases as the employment rate rises.
D) decreases as the labor force increases.

Question 8

The distinguishing characteristics of business cycles are

A) periods of inflation followed by periods of deflation.
B) high rates of economic growth coupled with high rates of unemployment.
C) a constant rate of economic growth coupled with ups and downs in the general level of prices.
D) periods of growth in real output followed by periods of decline.

Question 9

Which of the following will most likely occur during the contractionary phase of a business cycle?

A) Real GDP rises, and the unemployment rate falls.
B) Real GDP declines, and the rate of inflation rises.
C) The sales of most businesses decline, and the unemployment rate rises.
D) Inflation rises, and employment/population ratio falls.

Question 10

The 25 years prior to the crisis of 2008-2009 were

A) characterized by more instability than the first 50 years of the twentieth century.
B) the most stable economic quarter of a century in American history.
C) characterized by more monetary and price instability than any era other than the 1970s.
D) a period of historically slow growth and high unemployment.

Question 11

The period of growth in real GDP between the trough of the business cycle and the next peak is called the

A) recessionary phase.
B) expansionary phase.
C) contractionary phase.
D) cyclical phase.

Question 12

Potential output is the

A) maximum rate of output that can ever be achieved.
B) highest rate of output that has ever been achieved in the past.
C) maximum sustainable output level consistent with the economy's resource base and current institutions.
D) the rate of output present when the general level of prices is unstable.

Question 13

Potential GDP

A) is always less than actual GDP.
B) is identical to actual GDP.
C) measures inflation.
D) is the output an economy could produce at full employment.

Question 14

Which of the following is true of the business cycle record of the United States?

A) Recessions have been lengthier during the last two decades than was true prior to 1980.
B) Real GDP contracted throughout most of the 1950s.
C) Real GDP in 2000 was approximately the same as 1950.
D) Since 1950, the fluctuations in GDP have been less severe than before 1950.

Question 15

The expansionary phase of the business cycle is characterized by

A) decreasing real output and increasing unemployment.
B) decreasing real output and declining unemployment.
C) increasing real output and increasing unemployment.
D) increasing real output and declining unemployment.

Question 16

Which of the following about business cycles is true?

A) A "depression" is a recession that is mild and relatively brief.
B) The expansions and contractions of business cycles last varying lengths of time.
C) The timing of business fluctuations is regular and, therefore, easily predictable.
D) During the recessionary phase of the business cycle, the rate of unemployment is generally quite low.

Question 17

Which of the following is most indicative of a recession?

A) a decline in unemployment
B) a rise in inflation
C) a decline in real GDP
D) an increase in the interest rate

Question 18

The economy's potential output is

A) the maximum output that could be achieved temporarily during a time of economic boom.
B) the minimum output that could be achieved during a recession.
C) present when 100 percent of the labor force is employed.
D) the maximum sustainable output of the economy given its resources.

Question 19

During a period of rapid growth in output,

A) employment generally increases and unemployment decreases.
B) employment generally decreases and unemployment increases.
C) both employment and unemployment generally increase.
D) both employment and unemployment generally decrease.

Question 20

During a sustained economic expansion,

A) the rate of unemployment will generally fall and the employment/population ratio will generally rise.
B) the rate of unemployment will generally rise and the employment/population ratio will generally fall.
C) both the rate of unemployment and the employment/population ratio will generally decline.
D) both the rate of unemployment and the employment/population ratio will generally rise.

Question 21

Full employment means which of the following is zero?

A) structural unemployment
B) cyclical unemployment
C) frictional unemployment
D) aggregate unemployment

Question 22

The natural rate of unemployment occurs if there is no

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

Question 23

Which of the following types of unemployment can exist in an economy that is at its potential output level?

A) cyclical unemployment only
B) structural unemployment only
C) frictional, cyclical, and seasonal unemployment only
D) frictional, seasonal, and structural unemployment only
E) there will be no unemployment in an economy that is at the potential output level

Question 24

When real GDP grows more slowly than potential GDP,

A) nominal GDP rises.
B) the unemployment rate falls.
C) labor productivity falls.
D) the unemployment rate rises.

Question 25

If an economy is at its potential output level, which of the following is not true?

A) The economy is at its full-employment output level.
B) Unemployment is at the natural level.
C) The price level is zero.
D) The output level being produced can be sustained indefinitely given the economy's resources and technology.
E) The only unemployment is frictional or structural.

Question 26

The natural rate of unemployment

A) increases sharply during a recession but declines significantly during a business expansion.
B) is the unemployment rate accompanying the economy's maximum sustainable output.
C) is generally less than the unemployment rate associated with the economy's full-employment rate of output.
D) is present when the economy operates at approximately 94 percent of its potential GDP.

Question 27

During a recession, which of the following will be true?

A) The actual rate of unemployment will be lower than the natural rate.
B) Actual GDP will be lower than potential GDP.
C) The employment/population ratio will increase substantially.
D) Actual inflation will be higher than was anticipated.

Question 28

If unemployment in the United States was approximately 5 percent, most economists would believe that the economy was

A) experiencing abnormally high unemployment.
B) at or near full employment.
C) experiencing an abnormally high labor force participation rate.
D) in the midst of a strong economic boom.

Question 29

Which of the following about potential GDP is true?

A) During a recession, actual GDP will exceed potential GDP.
B) Actual GDP cannot exceed potential GDP, even for short periods.
C) Actual output may be either above or below potential output depending on how fully resources are utilized.
D) The economy's potential output is the maximum output that could be achieved temporarily during a time of economic boom.

Question 30

Which of the following is a true statement about potential output?

A) The concept of potential output might be thought of as the maximum sustainable output of the economy under normal circumstances.
B) Actual output cannot exceed potential output, even during a boom.
C) When the actual rate of unemployment exceeds the natural rate, the actual output of the economy will rise above its potential.
D) Potential output represents the absolute maximum level of production.

Question 31

Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of

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

Question 32

Which of the following is true of unemployment?

A) The natural rate of unemployment is present when the economy is operating at full employment.
B) The natural rate of unemployment is equal to the number of persons unemployed divided by the number of persons in the labor force.
C) The natural rate of unemployment is primarily the result of the ups and downs of the business cycle.
D) Public policy cannot influence the natural rate of unemployment.

Question 33

In a modern dynamic economy such as the United States, full employment generally means

A) cyclical unemployment is present.
B) everyone (excluding teenagers) that would like to work is employed.
C) approximately 95 percent of the labor force is employed.
D) 100 percent of the labor force is either working or seeking work.

Question 34

Economists define full employment as the level of employment that results when

A) the economy is in an economic boom.
B) the rate of unemployment is zero.
C) the rate of unemployment has fallen to its historical low of approximately two percent.
D) the rate of unemployment is normal, considering both frictional and structural factors.

Question 35

The economy is considered to be at full employment when

A) the actual rate of unemployment is less than the natural rate.
B) the leading economic indicators are unchanged for two consecutive quarters.
C) structural unemployment is zero.
D) frictional plus structural unemployment is less than the natural rate.
E) the rate of cyclical unemployment is zero.

Question 36

Actual GDP will be below potential GDP

A) when the economy is at full employment.
B) during an economic boom.
C) when resources are fully utilized.
D) during a recession.

Question 37

When the rate of cyclical unemployment is zero, the

A) natural rate of unemployment must also be zero.
B) rate of frictional unemployment must be negative.
C) economy must have entered a recessionary stage.
D) economy is considered to be at full employment.

Question 38

During an economic boom,

A) the actual rate of unemployment will exceed the natural rate of unemployment.
B) the output of the economy will exceed its long-run potential output.
C) widespread unemployment will cause inflation to increase.
D) the actual rate of unemployment will equal the natural rate of unemployment.

Question 39

Which of the following about unemployment is true?

A) Frictional unemployment implies a lack of available jobs.
B) During a recession, cyclical unemployment will be low.
C) When an economy is at full employment, actual unemployment will be less than the natural rate of unemployment.
D) When actual GDP equals potential GDP, the actual unemployment rate will equal the economy's natural rate of unemployment.

Question 40

The natural rate of unemployment

A) is a temporary low rate that cannot be maintained.
B) is fixed; it cannot be altered by public policy.
C) is equal to the number of persons unemployed divided by the number in the labor force.
D) is the unemployment rate accompanying the economy's maximum sustainable rate of output.

Question 41

The actual rate of unemployment will generally

A) increase as an economy enters a recession.
B) decrease as an economy enters a recession.
C) fall below the natural rate of unemployment during a recession.
D) do both a and c.

Question 42

Which of the following will most likely increase the natural rate of unemployment?

A) a decrease in the minimum wage
B) an increase in unemployment benefits
C) an increase in the number of people who stop looking for a job
D) an increase in the proportion of prime-age workers as a share of the labor force

Question 43

Which of the following will most likely cause a decrease the natural rate of unemployment?

A) an increase in the minimum wage
B) an increase in unemployment benefits
C) an increase in experienced workers aged 25 and over as proportion of the labor force
D) an increase in the labor force participation rate of teenagers

Question 44

If borrowers and lenders expect a higher rate of inflation,

A) nominal interest rates will tend to fall.
B) real interest rates will tend to fall.
C) nominal interest rates will tend to rise.
D) real interest rates will tend to rise.

Question 45

The current U.S. unemployment insurance program

A) tends to significantly lower the unemployment rate.
B) tends to modestly lower the unemployment rate.
C) has no effect on the unemployment rate.
D) tends to raise the unemployment rate.

Question 46

During  the recession of 2008-2009, the length of time qualified workers were permitted to draw unemployment benefits was increased from 26 to up to 99 weeks. Economic theory indicates that this extension would

A) reduce the opportunity cost of job search and lead to longer spells of unemployment.
B) increase the opportunity cost of job search and lead to shorter spells of unemployment.
C) reduce the long-term rate of unemployment.
D) increase the current supply of labor and make it easier for employers to hire workers.

Question 47

The natural rate of unemployment is not zero because

A) some workers will always have few skills.
B) unemployment will always rise during the recessionary phase of the business cycle.
C) the economy is characterized by dynamic change and imperfect information.
D) not every member of society is capable of participating in the labor force.

Question 48

During an economic boom period, the actual rate of unemployment will be

A) less than the natural rate of unemployment.
B) greater than the natural rate of unemployment.
C) equal to the natural rate of unemployment.
D) unaffected by the economic expansion.

Question 49

Which of the following about unemployment is true?

A) The unemployment rates of the major European economies have been lower than the United States during the last decade.
B) The natural rate of unemployment is unaffected by labor market regulations and other dimensions of public policy.
C) High unemployment rates over lengthy time periods are indicative of structural factors that are adversely affecting the natural rate of unemployment.
D) The unemployment rates of Spain and Italy were among the lowest in the world during the past two decades.

Question 50

After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing power. Therefore, it must be true that actual inflation was

A) greater than expected inflation.
B) equal to expected inflation.
C) less than expected inflation.
D) greater than the nominal rate of interest.

Question 51

The natural rate of unemployment

A) is due to cyclical business conditions.
B) results from normal dynamic changes given the institutional arrangements of the economy.
C) results from both frictional and cyclical economic conditions.
D) is present when the economy is at the peak of an economic boom.

Question 52

During a recession, the actual rate of unemployment will be

A) less than the natural rate of unemployment.
B) greater than the natural rate of unemployment.
C) equal to the natural rate of unemployment.
D) unaffected by the economic contraction.

Question 53

Which of the following about unemployment is true?

A) The unemployment rates of the major European economies were substantially lower than in the United States during the last decade.
B) High unemployment rates over lengthy time periods are indicative of structural and regulatory factors that are exerting an adverse impact on the natural rate of unemployment.
C) The natural rate of unemployment is unaffected by changes in the age composition of the labor force (for example, an increase in the relative number of youthful workers).
D) Institutional changes such as an increase in the minimum wage may increase cyclical unemployment but will not affect the natural rate of unemployment.

Question 54

Older Americans living on a pension and therefore on a fixed income, tend to be made

A) better off when prices rise.
B) better off when the inflation rate rises.
C) worse off when prices rise.
D) worse off when prices fall.

Question 55

During periods when the inflation rate fluctuates widely,

A) all relative prices increase at the same rate, leaving money prices constant
B) economic efficiency increases because decision makers pay closer attention to changes in money prices
C) uncertainty about changes in relative prices causes a decrease in economic efficiency
D) all money prices increase at the same rate, leaving relative prices constant

Question 56

The best definition of inflation is

A) a temporary increase in prices.
B) an increase in the price of one important commodity such as food.
C) a persistent increase in the general level of prices as measured by a price index.
D) an increase in the purchasing power of the dollar.

Question 57

The current U.S. unemployment insurance program tends to

A) increase the incentive to switch occupations.
B) reduce the time workers stay unemployed.
C) make it more costly for unemployed workers to turn down available jobs.
D) raise the unemployment rate.

Question 58

Full employment is the rate of employment that results when

A) all labor resources of an economy are employed.
B) there is efficient use of the labor force, with allowance made for normal unemployment due to dynamic changes and the structural conditions of the economy.
C) cyclical unemployment is between 4 and 5 percent of the labor force.
D) everybody who wants a job can find one.

Question 59

Which of the following will most likely reduce the natural rate of unemployment?

A) an increase in the minimum wage
B) an increase in unemployment benefits
C) an increase in the proportion of prime-age workers (35-54) as a share of the labor force
D) an increase in the labor force participation rate of teenagers

Question 60

The actual rate of unemployment will generally

A) increase as an economy enters an economic boom period.
B) decrease as an economy enters an economic boom period.
C) exceed the natural rate of unemployment during an economic boom period.
D) do both a and c.

Question 61

Gabriela, a brilliant new Ph.D. in economics, has turned down many job offers because she hopes eventually to teach at one of the top ten universities in her field. The type of unemployment she is experiencing is

A) frictional
B) structural
C) seasonal
D) cyclical
E) underemployment

Question 62

At the beginning of a year, decision makers expect the general level of prices to increase at a 3 percent annual rate. The CPI increases from 150 to 154.5 during the year; this is an example of

A) an inflation rate that is equal to 4.5 percent.
B) an unanticipated increase in the general level of prices.
C) an increase in the general level of prices that was accurately anticipated.
D) an inflation rate that is less than what people anticipated.

Question 63

The reduction of structural unemployment in the United States' economy may require

A) an increase in the minimum wage.
B) a reduction in government spending.
C) an decrease in interest rates.
D) increased spending on worker retraining.

Question 64

High and variable rates of inflation will

A) distort the information delivered by market prices.
B) encourage people to spend more time producing and less time trying to protect their wealth.
C) decrease the risks that accompany the undertaking of long-term investment projects.
D) promote economic growth and the efficient use of resources.

Question 65

Which type of unemployment is most likely to help the economy become more efficient?

A) cyclical
B) structural
C) seasonal
D) frictional
E) underemployment

Question 66

When the inflation rate of a country is high over a lengthy time period,

A) the year-to-year variability in the rate of inflation is generally small.
B) the year-to-year variability in the rate of inflation is generally large.
C) decision makers will be able to forecast future rates of inflation accurately.
D) there is no reason to believe that the inflation will exert harmful side effects on real output and the prosperity of the country.

Question 67

A person who argues that inflation "robs us of the purchasing power of our paychecks" should also consider that inflation

A) increases the value of the dollar, making paychecks worth more.
B) will increase the size of paychecks as well as the prices of goods.
C) does not affect the value of the dollar, either in paychecks or in prices.
D) only affects the prices of things that we buy, not the prices of things that we sell.

Question 68

Which of the following is true of high and variable rates of inflation?

A) When such rates are present, it will be difficult for people to accurately forecast next year's rate of inflation.
B) Inflation of this type will help promote economic growth and the efficient use of resources.
C) People will respond to such rates by spending more time producing and less time trying to protect their wealth and income from the uncertainty created by the inflation.
D) Inflation of this type will improve the information content delivered by market prices.

Question 69

The value of money

A) remains constant during periods of inflation.
B) varies inversely with the general price level.
C) varies directly with the general price level.
D) varies indirectly with output.

Question 70

Which of the following about inflation is true?

A) High rates of inflation are usually associated with wide year-to-year changes in inflation.
B) High rates of inflation are usually associated only with very large countries such as the United States.
C) High rates of inflation are usually associated only with smaller countries such as Costa Rica.
D) High rates of inflation will generally improve the economic efficiency of an economy.

Question 71

In contrast with unanticipated inflation, anticipated inflation implies that

A) the government was informed about inflation.
B) most decision makers expected the general increase in the price level.
C) the increase in the general level of prices was growth of GDP.
D) the increase in the general level of prices was expected by borrowers but not lenders.

Question 72

Which of the following is a danger of high rates of inflation?

A) Price changes encourage long-term contracts at the expense of short-term contracts.
B) Rapid price changes reduce uncertainty.
C) Inflation increases the real value of assets, such as stocks and bonds.
D) Inflation will encourage people to spend less time producing and more time trying to protect the value of their assets.

Question 73

Which of the following is a danger of inflation?

A) Price changes can affect the people who sign long-term contracts.
B) Rapid price changes reduce uncertainty.
C) Anticipated inflation may be greater than unanticipated inflation.
D) High rates of inflation will reduce interest rates.

Question 74

Which of the following is an example of someone with inflationary expectations taking a step designed to insulate themselves from the higher expected rates of inflation?

A) a consumer deciding to delay the purchase of a new home or automobile
B) a consumer who borrows money at a fixed interest rate in order to purchase a new home or automobile
C) an investor who borrows funds at an adjustable money interest rate (one that automatically increases with higher inflation)
D) a home buyer who borrows funds at a variable interest rate

Question 75

If the consumer price index (CPI) was 125 at year-end of 2008 and 132.5 at year-end 2009, inflation during 2009 was

A) zero; prices were stable during 2009.
B) 6.0 percent.
C) 7.5 percent.
D) 12.5 percent.

Question 76

Which of the following about inflation is true?

A) High and variable rates of inflation will be easy for decision makers to forecast accurately.
B) Unanticipated inflation is an increase in the general level of prices that was not expected by most decision makers.
C) In contrast with unanticipated inflation, anticipated inflation implies that the increase in the general level of prices was expected by borrowers but not lenders.
D) Inflation will increase the prices of goods and services that households purchase but not the wage rates of workers.

Question 77

Regarding inflation, which of the following is a true statement?

A) Unanticipated inflation is a change in the general level of prices that catches most decision makers by surprise.
B) High and variable rates of inflation are easy for decision makers to forecast accurately.
C) High and variable rates of inflation can increase GDP by reducing investment.
D) When decision-makers are able to anticipate slow, steady rates of inflation, prices become more unstable and there is a negative impact on the level of prosperity.

Question 78

Regarding inflation, which of the following is true?

A) Anticipated inflation is an increase in the price level that comes as a surprise, at least to most individuals.
B) Unanticipated inflation is a change in the price level that is widely expected.
C) When the inflation rate is high and variable, decision makers will generally be able to anticipate year-to-year changes in inflation quite accurately.
D) Inflation will tend to increase the nominal values of both prices and wages.

Question 79

At the beginning of a year, decision makers expect the general level of prices to increase at a 6 percent annual rate. The CPI increases from 150 to 154.5 during the year; this indicates that

A) decision makers underestimated the rate of inflation during the year.
B) decision makers overestimated the rate of inflation during the year.
C) decision makers accurately forecast the rate of inflation during the year.
D) the rate of inflation during the year was 4.5 percent.

Question 80

Which of the following about inflation is true?

A) Anticipated inflation is an increase in the price level that comes as a surprise, at least to most individuals.
B) Unanticipated inflation is a change in the price level that is widely expected.
C) Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy.
D) Inflation will increase the prices of goods and services that households purchase but not the wage rates of workers.