Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1) Which of the following explains the changes in the U.S. adult male labor force participation rate
since 1948?
A) younger men are remaining in school longer as compared to the past
B) more men are joining the military as compared to the past
C) fewer men consider themselves discouraged workers as compared to the past
D) more men are retiring later in life as compared to the past

1)

2) The advice to "retrain" would be most appropriate for which of the following types of
unemployment?
A) cyclical unemployment
B) core unemployment
C) structural unemployment
D) frictional unemployment

2)

3) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics
to overstate the true extent of joblessness?
A) discouraged workers
B) inflation
C) counting people as employed who are working part time, although they would prefer to be
working full time
D) unemployed persons falsely report themselves to be actively looking for a job

3)

4) The producer price index measures the prices that firms

A) pay for labor, whether or not the labor is foreign or domestic.
B) receive for the goods and services they export.
C) receive for the goods and services they use at all stages of production.
D) pay for imported natural resources that go into the production process.

4)

5) If the price level rose in three consecutive years from 100 to 120 to 140, then the annual inflation
rate over those years would
A) remain the same.
B) decrease.
C) equal 20%.
D) increase.

5)

6) In September 2011, Bank of America laid off 30,000 employees. The laid-off employees who were
not able to find jobs at another bank due to a permanent decline in business in the financial
industry would be considered
A) structurally unemployed.
B) seasonally unemployed.
C) frictionally unemployed.
D) cyclically unemployed.

6)

7) Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus
$600 of interest. If the inflation rate was 4%, what was the real interest rate you paid?
A) 16 percent
B) 12 percent
C) 8 percent
D) 6 percent

7)

8) Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in
2010, then the value of your grandfather's salary in 2010 dollars is approximately
A) $84,775.
B) $63,830.
C) $37,200.
D) $26,280.

8)

Table 9-8

Year
1965
2010

Nominal Average
Hourly Earnings
$2.65
22.59

CPI (1982-1984 = 100)

32
219

The table above reports the nominal average hourly earnings in private industry and the consumer price index for 1965 and
2010.

9) Refer to Table 9-8. The real average hourly earnings for 1965 in 2010 dollars equal
A) $3.87.
B) $5.80.
C) $12.10.
D) $18.14.

9)

10) In the modern U.S. economy, the typical unemployed person stays unemployed for
A) a relatively long time, over a year.
B) an amount of time that is hard to quantify.
C) for a long time during expansions and short time during recessions.
D) a relatively short time, less than six months.

10)

11) If we want to use a measure of inflation that foreshadows price changes before they affect prices at
the retail level, we would base our measure of inflation on
A) the GDP deflator.
B) the producer price index.
C) the household price index.
D) the consumer price index.

11)

12) Suppose that at the beginning of a loan contract, the real interest rate is 4% and expected inflation is
currently 6%. If actual inflation turns out to be 7% over the loan contract period, then
A) lenders gain 1% of the loan value.
B) lenders gain 3% of the loan value.
C) borrowers lose 3% of the loan value.
D) borrowers gain 1% of the loan value.

12)

13) Which of the following describes a situation in which the person is hurt by inflation?
A) a person who lends money during a period when inflation is over-predicted
B) a retiree whose pension is adjusted for inflation
C) a person paid a fixed income during an inflationary period
D) a person who borrows money during a period when inflation is under-predicted

13)

14) Suppose that in 2012, all prices in the economy double and that all wages and salaries have also
doubled. In 2012 you
A) cannot determine whether you are better off or worse off than you were in 2011, because the
purchasing power of your salary cannot be determined.
B) are better off than you were in 2011 as your salary is higher than it was in 2011 and you can
now buy more goods and services.
C) are no better off or worse off than you were in 2011 as the purchasing power of your salary
has remained the same.
D) are worse off than you were in 2011 as you can no longer afford to buy as many goods and
services.

14)

15) An unemployment insurance program has which of the following effects?

A) It decreases the amount of personal income of the unemployed.
B) It increases the amount of time spent searching for a job.
C) It contributes to the severity of a recession or economic downturn.
D) It lowers the overall unemployment rate.

15)

Table 9-2

Product
Milk
Bread

Quantity
50
100

Base Year (2006)

Price
$1.20
1.00

2011
Price
$1.50
1.10

16) Refer to Table 9-2. Assume the market basket for the consumer price index has two products
bread and milk with the following values in 2006 and 2011 for price and quantity: The Consumer
Price Index for 2011 equals
A) 118.
B) 116.
C) 86.
D) 85.

16)

17) You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year
is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing
power of ________.
A) $6,000; $5,500
B) $5,500; $5,250
C) $5,050; $5,025
D) $5,100; $5,050

17)

18) If inflation is positive and is perfectly anticipated,

A) those that hold paper money lose.
C) those that lend money lose.

18)

B) those that borrow money lose.

D) no one in the economy loses.

19) If the federal government implements programs so that the unemployed are more quickly matched
with jobs, then
A) the natural rate of unemployment will decrease.
B) the natural rate of unemployment will increase.
C) the natural rate of unemployment will not change.
D) the natural rate of unemployment could either increase or decrease.

19)

20) An advantage of the household survey over the establishment survey of the labor market is that the
household survey
A) includes the number of discouraged workers.
B) omits persons employed at newly opened firms.
C) is based on actual payrolls, rather than on unverified answers.
D) includes the number of self-employed persons.

20)

Table 9-1
Total population
Working-age population
Employment
Unemployment

20,000
15,000
1,000
100

Consider the data above for a simple economy.

21) Refer to Table 9-1. The unemployment rate for this simple economy equals
A) (100/20,000) 100.
B) (100/1,000) 100.
C) (100/15,000) 100.
D) (100/1,100) 100.

21)

22) Which of the following statements is true about the U.S. economy?
A) Each year, many new jobs are created, but few existing jobs are destroyed, and the
unemployed find jobs quickly.
B) Each year few jobs are created, and therefore it takes the unemployed a long time to find a
new job.
C) Each year, many new jobs are created and many existing jobs are destroyed.
D) Each year, few new jobs are created, but few existing jobs are destroyed, keeping
unemployment low.

22)

23) Cyclical unemployment is the result of

A) the search process of matching workers with jobs.
B) the ups and downs in inflation.
C) a slowdown in the economy.
D) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.

23)

24) The real wage equals the nominal wage ________ the CPI, all times 100.
A) times
B) divided by
C) minus

24)

D) plus

25) A student who just graduated from college but has not found a job would most likely be
A) seasonally unemployed.
B) structurally unemployed.
C) frictionally unemployed.
D) cyclically unemployed.

25)

26) If the BLS counted persons that are on active military service in the totals for employment, the labor
force, or the working-age population, this would
A) decrease the measured labor force participation rate.
B) decrease the number of persons in the working-age population.
C) decrease the measured unemployment rate.
D) decrease the number of persons in the labor force.

26)

27) When actual inflation is less than expected inflation,

A) borrowers gain and lenders lose.
C) borrowers and lenders both lose.

27)

B) borrowers lose and lenders gain.

D) borrowers and lenders both gain.

28) If an economy experiences deflation, the real interest rate

A) will be greater than the nominal interest rate.
B) will be equal to the deflation rate, so long as the nominal interest rate is positive.
C) will be negative when the nominal interest rate is positive.
D) will be less than the nominal interest rate.

28)

29) Minimum wage laws cause unemployment because the legal minimum wage is set
A) above the market wage, causing labor demand to be greater than labor supply.
B) too low.
C) below the market wage, causing labor demand to be less than labor supply.
D) below the market wage, causing labor demand to be greater than labor supply.
E) above the market wage, causing labor demand to be less than labor supply.

29)

30) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics
to understate the true extent of joblessness?
A) unemployed persons falsely report themselves to be actively looking for a job
B) discouraged workers
C) inflation
D) people employed in the underground economy

30)

31) Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn $35,000/year
in your first job in 2011. You know that average prices have risen steadily since 1961. You earn
A) more than 5 times as much as your grandfather in terms of real income.
B) 5 times as much as your grandfather in terms of real income.
C) less than 5 times as much as your grandfather in terms of real income.
D) less than 5 times as much as your grandfather in terms of nominal income.

31)

32) Suppose you lend $1,000 at an interest rate of 10 percent over the next year. If the expected real
interest rate at the beginning of the loan contract is 4 percent, then what rate of inflation over the
upcoming year would be most beneficial to you as the lender? An inflation rate
A) greater than 6 percent.
B) equal to 6 percent.
C) equal to 4 percent.
D) equal to 0 percent.

32)

33) Which of the following policies would reduce frictional unemployment?

A) a decrease in the minimum wage
B) implementing an unemployment insurance policy
C) a job retraining program
D) building an on-line job database that helps workers find jobs

33)

34) The nominal interest rate equals the real interest rate ________ the inflation rate.
A) divided by
B) plus
C) times
D) minus

34)

Table 9-8

Year
1965
2010

Nominal Average
Hourly Earnings
$2.65
22.59

CPI (1982-1984 = 100)

32
219

The table above reports the nominal average hourly earnings in private industry and the consumer price index for 1965 and
2010.

35) Refer to Table 9-8. The percentage change in real average earnings from 1965 to 2010 equals
A) 2.0 percent
B) 19.7 percent.
C) 24.5 percent.
D) 80.3 percent.

35)

36) The consumer price index is the

A) average of the prices of the goods and services purchased by a typical urban family of four.
B) average of the prices of new final goods and services produced in the economy over a period
of time.
C) cost of a market basket of goods and services typically consumed in the current period.
D) cost of a market basket of goods and services typically consumed in the base year.

36)

37) Most economists believe that the biases in the consumer price index cause the CPI to overstate the
true inflation rate by about
A) one to two percentage points.
B) one quarter percentage point.
C) one-half to one percentage point.
D) one and one-half percentage points.

37)

38) The recession of 2007-2009 and its aftermath had different effects on various sectors of the
economy. Which of the following sectors of the U.S. economy had the highest unemployment rate
in August 2011, topping 12 percent?
A) construction
B) financial activities
C) education and health services
D) manufacturing

38)

39) The substitution bias in the consumer price index refers to the idea that consumers ________ the
quantity of products they buy in response to price, and the CPI does not reflect this and ________
the cost of the market basket.
A) change; under-estimates
B) do not change; under-estimates
C) do not change; over-estimates
D) change; over-estimates

39)

40) The labor force participation rate equals the

A) (labor force divided by the total population) 100.
B) (number of employed divided by the labor force) 100.
C) (labor force divided by the number of people not in the labor force) 100.
D) (labor force divided by working-age population) 100.

40)

41) The unemployment rate is an important economic statistic that can tell us about the health of the
economy. If the unemployment rate turns out to be high or higher than anticipated, we would
expect
A) that jobs are less difficult to find.
B) that stock prices are more likely to fall.
C) that investors will be more optimistic about the economy.
D) it is more likely that an incumbent president will be re-elected.

41)

42) Suppose the government launches a successful advertising campaign that convinces workers with
high school degrees to quit their jobs and become full time college students. This would cause
A) the unemployment rate to decrease.
B) the number of discouraged workers to increase.
C) no change in the unemployment rate.
D) the labor force participation rate to decrease.

42)

43) The cost to firms of changing prices

A) is called a menu cost.
B) is small even when there is rapid inflation.
C) does not exist if inflation is perfectly anticipated.
D) all of the above

43)

Table 9-5
Year
2010
2011

CPI
207
215

44) Refer to Table 9-5. Consider the following values of the consumer price index for 2010 and 2011.
The inflation rate for 2011 was equal to
A) 215 percent.
B) 21.5 percent.
C) 8.0 percent.
D) 3.9 percent.

44)

45) Which of the following would be a consequence of substitution bias in the CPI?
A) The inflation rate based on the CPI would under-estimate the true level of inflation.
B) Social Security payments would not adequately compensate retired workers for inflation.
C) Judges would award child support payments that would not adequately keep up with the
true cost of inflation.
D) Businesses would over-compensate employees for inflation when giving the cost of living
rises.

45)

46) The Bureau of Labor Statistics would categorize a retiree who is not working as
A) a discouraged worker.
B) employed.
C) out of the labor force.
D) unemployed.

46)

47) An increase in unemployment insurance payments would, in effect, ________ the amount of time
spent searching for a job, which would increase ________ unemployment.
A) increase; frictional
B) increase; cyclical
C) decrease; cyclical
D) decrease; frictional

47)

48) The unemployment rate equals the number of unemployed divided by the ________, all times 100.
A) number of employed
B) working-age population
C) labor force
D) total population

48)

49) Structural unemployment is the result of

A) a slowdown in the economy.
B) the ups and downs in inflation.
C) the search process of matching workers with jobs.
D) a persistent mismatch between the skills and characteristics of workers and the requirements
of the jobs.

49)

50) The Bureau of Labor Statistics would categorize a person as ________ if they were temporarily
away from their job because they were ill.
A) unemployed
B) a discouraged worker
C) out of the labor force
D) employed

50)

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
51) When the actual inflation rate turns out to be greater than the expected inflation rate, who
gains the borrower or the lender and who loses? Explain why.

51)

52) The Bureau of Labor Statistics does not count discouraged workers as unemployed.
Suppose discouraged workers were counted as unemployed. Explain how the
unemployment rate and the labor force participation rate would change.

52)

53) Discuss the likely impact of each of the following on the unemployment rate:
a. The length of time workers are eligible to receive unemployment insurance payments
is cut in half.
b. The government passes a law making labor unions illegal.
c. The minimum wage is raised by 50 percent.
d. The government funds an Internet site where companies can post job openings at no
charge.

53)

Table 9-11

Year
1976
1981
1994
2011

Month
June
September
December
October

Average Retail Price

Unleaded Regular
Gasoline
(cents per gallon)
59.2
137.6
114.3
340.0

CPI
(1982-1984 = 100)
56.8
93.2
149.7
226.9

Source: Energy Information Administration

54) Refer to Table 9-11. The table above reports the consumer price index and the average U.S.
retail price for unleaded regular gasoline for four different periods since 1976. Note that
the gasoline prices are in cents per gallon.
Calculate the real average retail price of unleaded regular gasoline in 1982-1984
dollars. In which period were gasoline prices the highest in real terms? Also, calculate the
real average retail price of unleaded regular gasoline in 2011 dollars.

54)

55) Fill in the missing values in the table of data collected in the household survey for
November, 2009. The working-age population, employment, unemployment, and labor
force are measured in thousands. Show your work.

55)

Working-age
population
Employment
Unemployment
Unemployment rate
Labor force
Labor force
participation rate

235,900

9.4%

65.5%

Answer Key
Testname: WEEK 5 PRACTICE
1) A
2) C
3) D
4) C
5) B
6) A
7) C
8) A
9) D
10) D
11) B
12) D
13) C
14) C
15) B
16) B
17) B
18) A
19) A
20) D
21) D
22) C
23) C
24) B
25) C
26) C
27) B
28) A
29) E
30) B
31) C
32) D
33) D
34) B
35) C
36) A
37) C
38) A
39) D
40) D
41) B
42) D
43) A
44) D
45) D
46) C
47) A
48) C
49) D
50) D
9

Answer Key
Testname: WEEK 5 PRACTICE
51) The borrower gains because he pays back the loan in cheaper dollars dollars that have lost more purchasing power
than was expected. The lender loses because she receives dollars that have lost more purchasing power than was
expected.
52) Both the unemployment rate and the labor force participation rate would increase. The number of unemployed would
rise, as would the labor force. The unemployment rate would rise because adding the same number to the numerator
and the denominator of a fraction that is less than one increases the value of the fraction. The labor force participation
rate would rise because the labor force increases with no change in the working-age population.
53) a. The unemployment rate will likely decrease, since decreasing the time people are eligible to receive
unemployment benefits will increase the opportunity cost of searching for a job.
b. The unemployment rate will likely decrease the unemployment rate, since companies will no longer have to pay
above-market union wages and will be able to afford to hire more workers.
c. The unemployment rate will likely increase since an increase in minimum wage will raise the wage above the
market wage for some workers.
d. The unemployment rate will likely decrease, since making information on job openings more available lowers the
search involved in frictional unemployment.
Nominal gasoline price
100.
54) Real gasoline price in 1982-1984 dollars =
CPI
Real gasoline price in 2011 dollars =
Real gasoline price in 1982-1984 dollars

Year
1976
1981
1994
2011

Month
June
September
December
October

Average
Retail Price
Unleaded
Regular
Gasoline
(cents per
gallon)
59.2
137.6
114.3
340.0

CPI in 2011
CPI in 1982-1984

Real Average
Retail Price Real Average
Unleaded
Retail Price
Regular
Unleaded
Gasoline
Regular
(cents per
Gasoline
CPI
gallon)
(cents per
(1982-1984 = (1982-1984 gallon) (2011
100)
dollars)
dollars)
56.8
104.2
236.4
93.2
147.6
334.9
149.7
76.4
173.4
226.9
149.8
340.0

The highest gasoline prices in real terms were in October, 2011.

10

Answer Key
Testname: WEEK 5 PRACTICE
55)
Working-age
population
Employment
Unemployment
Unemployment rate
Labor force
Labor force
participation rate

235,900
139,991
14,524
9.4%
154,515
65.5%

Labor force participation rate =

Labor force
100.
Working-age population

Labor force = (Working-age population Labor force participation rate)/100

Labor force = (227,204 66.1)/100 = 150,182
Unemployment rate =

Unemployed
100.
Labor force

Unemployed = (Labor force Unemployment rate)/100

(150,182 5)/100 = 7,509
Labor force = Employed + Unemployed
Employed = Labor force - Unemployed
Employed = 150,182 - 7,509 = 142,673

11