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Econ exam 4

The unemployment rate may underestimate the true extent of unemployment if:
-many part-time employees would like to work full-time, but are unable to get the additional work.
Which of the following is false?

A. People looking for full-time work who grudgingly settle for a part-time job are counted as employed, even though they are only “partly” employed.

B. Some people working in the underground economy could be counted in labor statistics as unemployed, while others may be counted as not in the labor force.

C. Unemployment rates can be quite different across different segments of the population, as well as varying substantially over time.

D. The duration of unemployment tends to be greater when the amount of unemployment is high, and smaller when the amount of unemployment is low.

E. None of the above are false; all are true.

E. None of the above are false; all are true.
A major macroeconomic goal of nearly every society is:
-maintaining stability of prices.
-maintaining high levels of employment.
-achieving high rates of economic growth.
Which of the following individuals are considered officially unemployed?

A. a discouraged worker
B. an individual who quits his job to raise a child
C. an individual who is not looking for a job because he works in the underground economy
D. an inmate in a prison who is making license plates for the state
E. none of the above

E. none of the above
Discouraged workers are defined as those:
-who have given up looking for a job and are not counted as unemployed.
Kathryn chooses to go to college full-time rather than to work. Kathryn:
-is not part of the labor force.
The total labor force equals:
-the number of employed plus the number of unemployed persons.
The unemployment rate is the number of people classified as unemployed as a percentage of:
-the labor force.
Underemployment occurs when:
-Underemployment occurs when a worker is over-qualified and possesses more skills than his job demands.

The term underemployed can also refer to workers who are only able to find part time work, but would prefer to work full time.

The FIRST formal acknowledgement of the primary macroeconomic goals of price stability, high employment, and promoting economic growth in the United States came with passage of the:
-the Employment Act of 1946.
Which of the following is true?

A. At the natural rate of unemployment, the economy is considered to be at full employment.

B. At full employment, the economy is producing at its potential output.

C. If unemployment is greater than its natural rate, the economy is producing at less than its potential output.

D. If we are at less than full employment, some cyclical unemployment exists.

E. All of the above are true.

E. all of the above are true
The natural rate of unemployment:
-is the sum of both frictional and structural unemployment when they are at a MAXIMUM.
In recent years, economists have come to believe that full employment in the U.S. economy occurs at an unemployment rate between:
-4.5 and 5.5 percent.
According to Okun’s law, a 2 percent increase in cyclical unemployment reduces output by almost:
-4 percent.
A federal program aimed at retraining the unemployed workers of the declining coal and steel industries is designed to reduce which type of unemployment?
-structural
Frictional unemployment occurs when:
-a worker decides to quit to seek a different job.
Which of the following people is structurally unemployed?

A. Brendan left his job as a short-order cook in New Jersey to become a short-order cook in Madrid, New Mexico. He was unemployed for six weeks during the transition.

B. Mildred quit her job after giving birth to a child.

C. Clem, a skilled corset maker, lost his job when his factory shut down due to a permanent reduction in the demand for corsets.

D. Danielle lost her job when the electronics assembly plant was shut down temporarily due to low product sales in a slumping economy.

E. John reduces his work hours as a furnace repairman in order to pursue a college education.

C. Clem, a skilled corset maker, lost his job when his factory shut down due to a permanent reduction in the demand for corsets.
Cyclical unemployment arises when:
-business activity in the macroeconomy declines.
When unemployment rises above the natural rate it reflects the existence of ____ unemployment.
-cyclical
If the economy is operating with full employment, which of the following is essentially eliminated?

A. frictional unemployment
B. structural unemployment
C. cyclical unemployment
D. all of the above

-C. cyclical unemployment
Economists use the term “business cycle” to refer to:
-fluctuations in economic activity, measured by GDP or unemployment.
An unanticipated period of deflation will:
-redistribute income from borrowers to lenders.
In the typical CPI shopping basket, which of the categories below represents the largest percentage of consumer spending?

A. housing
B. food & beverages
C. transportation
D. medical care
E. recreation

-A. housing
Given a fixed nominal interest rate on a loan, unanticipated DEFLATION:
-increases the burden of paying off the loan.
The GDP deflator represents a somewhat ____ measure of prices that the CPI and the GDP deflator tends to be ____ volatile than the CPI.
-broader; less
Why are creditors harmed by unexpected inflation?
-Creditors are paid back money with less spending power than when it was originally loaned out.
During an inflationary period, those most likely to suffer reduced wealth are those who are holding their wealth in:
-currency
The costs imposed on a firm from changing listed prices are called:
-the menu costs of inflation.
Which of the following groups would not tend to lose from unexpected inflation?
A. Retirees on fixed pensions.
B. Creditors.
C. Those whose incomes are tied to long-term contracts
D. Those whose wages have cost of living adjustment clauses in their contracts.
E. All of the above would tend to lose from unexpected inflation
-D. Those whose wages have cost of living adjustment clauses in their contracts.
Inflation exists whenever:
-the overall price level is rising.
The type of unemployment that occurs because of a recession is called:
-cyclical unemployment.
Which of the following describes the historical record of the business cycles in the United States?

A. The economy experiences an expansion about once every 20 years.

B. Severe depressions have occurred frequently throughout history.

C. Recessions have occurred every 25 years and are followed by two years of expansion.

D. Periods of contraction seem to have gotten shorter over time.

-D. Periods of contraction seem to have gotten shorter over time.
The period of declining growth in real GDP, between the peak of the business cycle and the trough, is called the:
-contractionary phase.
In the expansion phase of the business cycle:
-output is rising.
-unemployment is falling.
-consumer and business confidence is high.
-investment is rising.
Which of the following observations concerning phases of a business cycle is NOT correct?

A. Maximum amount of unemployment occurs exactly at the trough.

B. Expansion phase is measured from the trough to the peak.

C. Trough is the point in time when output stops declining.

D. The contraction phase is also called the recession.

-A. Maximum amount of unemployment occurs exactly at the trough.
Which of the following is true?

A. A depression is a recession that is mild and relatively brief.

B. The expansions and contractions of real world business cycles last varying lengths of time and often differ in magnitude.

C. The timing of business fluctuations is regular and therefore easily predictable.

D. During the contractionary phase of the business cycle, the rate of unemployment is generally quite low.

-B. The expansions and contractions of real world business cycles last varying lengths of time and often differ in magnitude.
Economists usually use the term “recession” to refer to:
-a significant reduction in output and employment lasting more than a few months.
Which of the following is not a leading economic indicator?

A. Prices of common stock

B. Number of new building permits and orders for factory equipment

C. Unemployment rate and duration of employment

D. Length of the average workweek

-C. Unemployment rate and duration of employment
Which of the following observations concerning leading economic indicators is true?
A. They provide warnings of likely downturns.
B. They provide accurate information on the depth of a downturn.
C. They provide accurate information on the duration of a downturn.
D. Both b. and c. are true.
-A. They provide warnings of likely downturns.?
Unemployment rises in ____, and falls in ____.
-contractions; expansions
The development of a nationwide computerized job bank listing of all job openings would be most likely to reduce:
-frictional unemployment.
A forestry worker who is out of work because of the temporarily low demand for wood products associated with a recession is defined as:
-cyclically unemployed.
If the number of employed persons in a country equals 24 million, the number of unemployed persons equals 8 million, and the number of persons over age 16 in the population equals 40 million, the unemployment rate equals:
-25 percent. (unemployed/employed+unemployed)
Given a fixed nominal interest rate on a loan, unanticipated INFLATION:
-decreases the burden of paying off the loan.
Fred has lost his factory job, replaced by welding robots, and soon plans to go to technical school to learn computer repair because he cannot find a similar job to the one he lost. The type of unemployment facing Fred is:.
-structural
An individual who voluntarily leaves one job and spends a period of time seeking another is considered:
-frictionally unemployed.
A country’s currency unit changes in purchasing power:
-when there is either inflation or deflation.
Which of the following individuals would be considered unemployed?

A. a lawyer temporarily working as an assistant in a law firm

B. a computer technician who has not worked for 10 months and gave up looking 4 months ago

C. a full time student who feels that he is taking too many classes to work

D. none of the above

-D. none of the above
If there are discouraged workers:
-the unemployment rate will tend to understate the true level of unemployment.
Which of the following groups are typically harmed by unexpected inflation?

A. lenders
B. borrowers
C. pensioners on fixed incomes
D. both a. and c.
E. both b. and c.

-D. both a. and c.
Which of the following groups of people would be included in the official unemployment rate?

A. part-time workers

B. workers temporarily laid off from jobs to which they expect to return

C. discouraged workers

D. all of the above

-B. workers temporarily laid off from jobs to which they expect to return
The index of leading economic indicators:
-provide accurate information on the depth of downturns in the economy.
-provides warnings of likely downturns
The index of leading economic indicators usually turns downward:
-prior to economic contractions.
A full-time college student who is enrolled in school full-time and not seeking employment is considered:
-out of the labor force.
Offering employees an efficiency wage may:
-reduce turnover.
-attract the most productive workers.
-lead to a reduction in training costs.
-boost employee morale.
If the economy is operating at the natural rate of unemployment, which of the following is essentially eliminated?

A. frictional unemployment
B. structural unemployment
C. cyclical unemployment
D. all of the above

-C. cyclical unemployment
Why do economists prefer using the term economic fluctuation rather than business cycle?
(find, chapter 11)
The term full employment implies an unemployment rate of:
-approximately 5%
Real gross domestic product is the total value of all:
-final goods and services adjusted for inflation.
Inflation:
-can cause a redistribution of income from creditors to borrowers.
-may discourage investment and economic growth.
-can decrease the value of a nation’s currency relative to other nations.
The unemployment rate is calculated as:
-the number of unemployed persons divided by the number of employed plus unemployed persons.
Which of the following refers to extremely high rates of inflation for sustained periods of time?

A. deflation
B. hyperinflation
C. bust
D. depression
E. expansion

-B. hyperinflation
The total labor force consists of:
-the number of employed persons plus the number of unemployed persons.
Deflation exists whenever:
-the overall price level falls.
The cost incurred when individuals reduce their money holdings because of inflation is termed as the:
-shoe-leather cost.
The government’s fiscal policy is its plan to regulate aggregate demand by manipulating:
-taxation and spending.
To offset the effect of a steep fall in net exports on the economy, the government might:
-increase government purchases.
How does a change in income taxes primarily affect aggregate demand?
-An income tax change alters disposable income and consumption spending.
The main components of spending, which can cause changes in aggregate demand, are:
-consumption, investment, government purchases, and net exports.
If unemployment is the most significant problem in the economy, which of the following actions would be an appropriate fiscal policy response?

A. decrease taxes
B. decrease transfer payments
C. increase government purchases
D. all of the above
E. both A and C above

-E. both A and C above
If the government sought to end a recession, which of the following would be an appropriate policy?

A. Increase taxes.
B. Decrease government purchases.
C. Decrease transfer payments.
D. Decrease taxes and increase transfer payments.
E. Increase taxes and decrease transfer payments.

-D. Decrease taxes and increase transfer payments.
Assume that the government is considering plans to increase aggregate demand in order to reduce unemployment. Which of the following would be effective?

A. Increase government purchases of goods and services.
B. Decrease taxes.
C.

Increase transfer payments.

D. Any of the above.

-D. Any of the above
Expansionary fiscal policy, other things being equal, will tend to:
-decrease unemployment rates.
Which of the following combinations of changes would have a contractionary effect on aggregate demand?

A. An increase in government purchases and an increase in transfer payments.

B. An increase in taxes and an increase in transfer payments.

C. A decrease in taxes and an increase in transfer payments.

D. An increase in taxes and a decrease in government purchases.

-D. An increase in taxes and a decrease in government purchases.
The largest single source of revenue for the federal government is the:
-personal income tax.
All decisions of the Federal Reserve are subject to approval by:
-only the Board of Governors of the Federal Reserve.
Which of the following is most frequently used when the Fed is attempting to adjust the money supply?

A. Changing reserve requirements
B. Open market operations
C. Changing the discount rate
D. Moral suasion
E. all of the above

-B. Open market operations
Which of the following is not a function of the Federal Reserve System?

A. limiting the national debt
B. setting the required reserve ratio for the deposit holdings of depository institutions
C. buying and selling government bonds to control the size and growth rate of the money supply
D. controlling inflation

-A. limiting the national debt
If the Fed buys a U.S. government bond from a member of the public,
-the banking system has more reserves and the money supply tends to grow.
Federal funds market rate is:
-the rate charged on loans provided to meet reserve requirement.
The primary reason that money is demanded is for:
-transaction purposes.
Ceteris paribus, when nominal GDP falls:
-interest rates will tend to fall.
When the money supply decreases, other things being equal,
-real interest rates rise and investment spending falls.
If the Fed sells bonds, the short-run impact of this policy will tend to include:
-an increase in real interest rates.
An expansionary monetary policy is likely to increase real output more than just temporarily:
-when the economy is operating at less than full capacity.
The prosperity of a nation today is typically measured by its:
-output per capita.
A country will roughly double its GDP in twenty years if its annual growth rate is:
-3.5 percent.
Sergei has developed a new fat substitute that has no calories and produces no side effects. In order for him to be encouraged to bring this innovation to the marketplace he is likely to want which of the following the most?

A. time to be able to thoroughly test the fat substitute
B. an ample supply of capital to start the manufacturing process
C. a trademark
D. a patent

-D. a patent
GDP is:
-the value of all final goods and services produced domestically within a given period of time.
Which of the following would not be counted as a final good for inclusion in GDP?

A. a piece of glass bought by a consumer to fix a broken window

B. a sheet of glass purchased by General Motors for the side window of a new car

C. a sheet of glass produced this year and ending up in the inventory of a retail hardware store

D. All of the above are counted.

E. Neither b. nor c. are counted.

-B. a sheet of glass purchased by General Motors for the side window of a new car
Which of the following products are not included in current U.S. GDP?

A. a Washington apple

B. a Ford Mustang produced last year and sold this year

C. a physical examination at a California health clinic

D. All of the above are included in current U.S. GDP.

-B. a Ford Mustang produced last year and sold this year
The largest single expenditure component of GDP is:
-consumption.
The most volatile GDP category under the expenditure approach is:
-investment
If a nation’s imports exceed its exports:
-GDP will be less than the sum of consumption, investment, and government purchases.
Which of the following would be an example or result of expansionary fiscal policy in action?

A. an increase in taxation
B. a decrease in government purchases
C. a budget deficit
D. a decrease in transfer payments
E. a budget surplus

-C. a budget deficit
Contractionary fiscal policy consists of:
-decreased government purchases, increased taxes, decreased transfer payments.
If government policy makers were worried about the inflationary dangers in the economy, which of the following would be a correct fiscal policy change?
A. Decrease consumption taxes.
B. Decrease government purchases of goods and services.
C. Increase transfer payments.
D. Increase the budget deficit.
E. None of the above.
-B. Decrease government purchases of goods and services.
You are a member of Congress when the economy is in a recession. If your goal is to achieve a fully employed labor force, which of the following fiscal policy scenarios should you follow?

A. Eliminate a federal budget deficit or add to a federal budget surplus.

B. Raise government purchases, reduce taxes, and/or increase transfer payments.

C. Decrease government purchases, increase taxes, and/or cut transfer payments.

D. Raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments.

-Raise government purchases, reduce taxes, and/or increase transfer payments.
Someone earning $150,000 per year will pay the same amount of ____________ as someone earning $150,000,000 per year:
-Social Security tax.
A decrease in net taxes (taxes minus transfer payments) would do which of the following in the short run?

A. decrease any budget deficit or increase any budget surplus
B. reduce the price level
C. reduce unemployment
D. reduce consumption purchases
E. All of the above.

-C. reduce unemployment
Typically, the budget deficit is financed by:
-issuing debt.
The major objective of the Federal Reserve System is to:
-help in generating stabilization policies for the economy.
Decisions regarding purchases and sales of securities by the Fed are made by:
-Federal Open Market Committee.
If the Federal Open Market Committee (FOMC) decides to expand the money supply, then:
-it will issue directions to purchase U.S. government securities, thus putting more reserves in the hands of banks.
When the Fed purchases government securities from a commercial bank, the bank:
-receives reserves that can be used to make additional loans.
Which of the following would constitute contractionary monetary policy by the Fed?

A. An increase in income tax rates, a cut in government spending, and an elimination of the investment tax credit

B. Open market sales of government securities, an increase in the discount rate, and an increase in reserve requirements

C. An increase in tariffs on imported goods and a decrease in foreign aid

D. Open market purchases of government securities, a cut in the discount rate, and an increase in reserve requirements

-B. Open market sales of government securities, an increase in the discount rate, and an increase in reserve requirements
Which of the following pairs of policies shift aggregate demand in the same direction?

A. A tax increase and an increase in the money supply.

B. A transfer payment decrease and an increase in the money supply.

C. A reduction in government purchases and decline in the money supply.

D. An increase in government purchases and a decline in the money supply.

E. None of the above pairs of policies shift aggregate demand in the same direction.

-C. A reduction in government purchases and decline in the money supply.
If the Fed sells bonds, the short-run impact of this policy will tend to include:
-an increase in real interest rates.
Expansionary monetary policy will tend to have what effect?
-Increase the money supply and lower interest rates
A contractionary policy can be:

A. a decrease in the money supply
B. an increase in the money supply
C. an increase in the interest rate.
D. a decrease in the interest rate.
E. either a. or c.

-E. either a. or c.
Real gross domestic product (RGDP)
-the total value of all final goods and services produced in a given period, such as a year or a quarter, adjusted for inflation
Employment Act of 1946
-a commitment by the federal government to hold itself accountable for short-run economic fluctuations.
Unemployment rate
-the percentage of the population aged 16 and older who are willing and able to work but are unable to obtain a job
Labor force
-the number of people aged 16 and older who are available for employment
Discouraged worker
-an individual who has left the labor force because he or she could not find a job
Job loser
-an individual who has been temporarily laid off or fired
Job leaver
-a person who quits his or her job
Reentrant
-an individual who worked before and is now reentering the labor force
New entrant
-an individual who has not held a job before but is now seeking employment
Underemployment
-a situation in which a workers skill level is higher than necessary for a job
Labor force participation rate
-the percentage of the working age population in the labor force
Frictional unemployment
-the unemployment that results from workers searching for suitable jobs and firms looking for suitable workers
Seasonal unemployment
-unemployment that occurs because of seasonal factors such as weather or fluctuations in the demand for some goods or services during different times of the year
Structural unemployment
-the unemployment that results from workers not having the skills to obtain long term employment
Cyclical unemployment
-unemployment due to short term cyclical fluctuations in the economy
Natural rate of unemployment
-the median, or “typical”, unemployment rate, equal to the sum of frictional structural unemployment when they are at a maximum
Potential output
-the amount of real output the economy would produce if its labor and other resources were fully employed, that is, at the natural rate of unemployment
Price level
-the average level of prices in the economy
Inflation
-a rise in the overall price level, which decreases the purchasing power of money
Deflation
-a decrease in the overall price level, which increases the purchasing power of money
Relative price
-the price of a specific good compared to the price of other goods
Price index
-a measure of the trend in prices paid for a certain bundle of goods and services over a given period
Consumer price index (CPI)
-a measure of the cost of a market basket that represents the consumption of a typical household
GDP deflator
-a price index that helps measure the average price level of all final consumer goods and services produced
Hyperinflation
-extremely high rates of inflation for sustained periods of time
Menu costs
-the costs imposed on a firm from changing listed prices
Shoe-leather cost
-the cost incurred when individuals reduce their money holdings because of inflation
Nominal interest rate
-the reported interest rate that is not adjusted for inflation
Real interest rate
-the nominal interest rate minus the inflation rate; also called the inflation adjusted interest rate
Business cycles
-short term fluctuations in the economy relative to the long term trend in output
Expansion
-when output (real gdp) is rising significantly–the period between the trough of a recession and the next peak
Peak
-the point in time when expansion comes to an end, that is, when output is at the highest point in the cycle
Contraction
-when the economy is slowing down–measured from the peak to the trough
Trough
-the point in time when output stops declining, that is, when business activity is at its lowest point in the cycle
Recession
-a period of significant decline in output and employment
Depression
-severe recession or contraction
Boom
-period of prolonged economic expansion
Leading economic indicators
-factors that economists at the commerce department have found typically change before changes in economic activity to occur
Economic growth
-an upward trend in the real per capita output of goods and services
Productivity
-the amount of goods and services a woker can produce per hour
Labor productivity
-output per unit of worker
Innovation
-applications of new knowledge that create new products or improve existing products
Research and development (R&D)
-activities undertaken to create new products and processes that will lead to technological progress
Gross domestic product (GDP)
-the measure of economic performance based on the value of all final goods and services produced within a country during a given period
Double counting
-adding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP
Expenditure approach
-calculation of GDP by adding the expenditures by market participants on final goods and services over a given period
Consumption
-purchases of final goods and services
Investment
-the creation of capital goods to augment future production
Fiscal policy
-use of government purchases, taxes, and transfer payments to alter equilibrium output and the price level
Budget deficit
-occurs when government spending exceeds tax revenues for a give fiscal year
Budget surplus
-occurs when tax revenues are greater than government expenditures for a given fiscal year
Progressive tax
-a tax designed so that those with higher incomes pay a greater proportion of their income in taxes
Regressive tax
-as a persons income rises, the amount his or her tax as a proportion of income falls
Excise tax
-a sales tax on individual products such as alcohol, tobacco, and gasoline
Flat tax
-a tax that charges all income earners the same percentage of their income
Ability to pay principle
-belief that those with the greatest ability to pay taxes should pay more than those with less ability to pay
Vertical equity
-different treatment based on level of income and the ability to pay principle
Benefits received principle
-the belief that those receiving the benefits from taxes are those who should pay for them
Open market operations
-purchase and sale of government securities by the Federal Reserve System
Discount rate
-Interest rate that the Fed charges commercial banks for the loans it extends to them
Federal funds market
-market in which banks provide short term loans to other banks that need cash to meet reserve requirements
Money market
-market in which money demand and money supply determine the equilibrium interest rate
Expansionary monetary policy in a recessionary gap
-the increase in the money supply will lower the interest rate. The lower interest rate reduces the cost of borrowing and the return to saving.
-in short, when the Fed increases the money supply, interest rates fall, and the quantity demanded of goods and services increases at each and every price level.
-aggregate demand curve shifts from AD1 to AD2.
-the result is greater RGDP growth at a higher price level at E2. (read example, pg. 354)
Contractionary monetary policy in an inflationary gap
-in order to combat inflation, suppose the Fed engages in an open market sale of bonds. This would lead to a decrease in the money supply, causing the interest rate to rise.
-the higher interest rate means that borrowing is more expensive, and the return to saving is higher.
-consequently, firms find it more costly to invest in plants and equipment, and households find it more costly to finance new homes.
-in short, when the Fed decreases the money supply, it raises the interest rate and decreases the quantity of goods and services demanded at every price level.
-the aggregate demand curve shifts leftward from AD1 to AD2
-the result is a lower RGDP and a lower price level at E2. The economy is now at RGDPnr where RGDP equals the potential level of output
Efficiency wage model
-a theory stating that higher wages lead to greater productivity
Minimum wage rate
-an hourly wage floor set above the equilibrium wage
Wage and price controls
-legislation used to combat inflation by limiting changes in wages and prices

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