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ECO2013 Ch. 26

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 percent of potential GDP is:
8 percent.
Part-time workers are counted as:
fully employed and therefore the official unemployment rate may understate the level of unemployment.
Unanticipated inflation:
reduces the real burden of the public debt to the Federal government.
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:
structural unemployment.
If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:
3 percent.
Answer the next question(s) on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions.
102 million.
Recurring upswings and downswings in an economy’s real GDP over time are called:
business cycles.
If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is:
$360 billion.
In which of the following cases would real income rise?
Nominal income rises by 2 percent, and the price level remains unchanged.
Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?
structural and frictional unemployment.
In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?
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:
Okun’s law.
If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is:
$510 billion.
Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then:
cyclical unemployment is about 2 percent.
Refer to the above data. If the unemployment rate in the above economy declined to 6 percent, we could conclude that:
the economy had moved from a point inside its production possibilities curve to a point on or near the curve.
In 2005, Tatum’s nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum’s real income:
rose by approximately 3 percent.
Inflation initiated by increases in wages or other resource prices is labeled:
cost-push inflation.
In the United States, the rate of unemployment is highest for:
African-American teenagers.
Innovations such as the microchip and the Internet lead to business cycle variations because:
significant innovations occur irregularly and unexpectedly.
The type of unemployment associated with recessions is called:
cyclical unemployment.
The official unemployment rate:
is the percentage of the labor force that is unemployed.
Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:
3 percent.
If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:
deflation of 3.33 percent.
The rate of inflation can be found by subtracting:
last year’s price index from this year’s price index and dividing the difference by last year’s price index.
Official unemployment statistics:
understate unemployment because discouraged workers are not counted as unemployed.
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:
Most economists agree that the immediate determinant of the volume of output and employment is the:
level of total spending.
Compared to other industrial nations, inflation rates in the United States are:
neither significantly higher nor significantly lower.
Refer to the above data. The size of the negative GDP gap as a percent of potential GDP for the above economy is:
12 percent.
Inflation is undesirable because it:
arbitrarily redistributes real income and wealth.
The labor force includes:
employed workers and persons who are officially unemployed.
During a severe recession, we would expect output to fall the most in:
the construction industry.
Refer to the above information. The rate of inflation:
cannot be determined from the data
Given the annual rate of inflation, the “rule of 70” allows one to
calculate the number of years required for the price level to double.
Given the annual rate of inflation, the “rule of 70” allows one to:
dividing the annual rate of inflation into “70.”
The phase of the business cycle in which real GDP is at a minimum is called:
the trough.
Demand-pull inflation:
occurs when total spending in the economy is excessive
Which of the following statements is correct? Unanticipated inflation:
arbitrarily “taxes” fixed-income groups.
Which of the following is not seen by economists as an underlying cause of business cycle fluctuations?
All of the above are identified as causes of business cycle changes
An unexpected increase in total spending will cause an increase in GDP:
if prices are sticky.
Cost-push inflation:
reduces real output
The production of durable goods varies more than the production of nondurable goods because:
durables purchases are postponable.
The aggregate cost of unemployment can be measured by the:
amount by which potential GDP exceeds actual GDP
Which of the following would most likely occur during the expansionary phase of the business cycle?
Demand-pull inflation
Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is:
not in the labor force.
Cost-of-living adjustment clauses (COLAs):
tie wage increases to changes in the price level
In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?
Capital goods
Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Kyle will be considered as:
frictionally unemployed.
Real income can be determined by
deflating nominal income for inflation.
Cost-push inflation may be caused by:
a negative supply shock.
Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called:
structural unemployment
The GDP gap measures the difference between:
actual GDP and potential GDP.
Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct?
No, because real income may fall if prices increase more proportionately than the increase in nominal income.
Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is:
6 percent
If actual GDP is less than potential GDP:
the actual unemployment rate will be higher than the natural unemployment rate.
unemployment and wait unemployment are types of:
frictional unemployment

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