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Chapter 2:
A. Government debt
D. Inventory investment
3. GDP is
A. a stock.
B. a flow.
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C. both a stock and a flow.
5. Suppose that a farmer grows wheat and sells it to a baker for $1, the baker makes bread
and sells it to a store for $2, and the store sells it to the customer for $3. This transaction
increases GDP by
A. $1.
B. $2.
C. $3.
D. $6.
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C. The value of automobile services enjoyed by car owners
D. The value-added of a shipping company that transports goods from the factory to
retail stores
A. imports rise.
B. exports fall.
9. Which of the following statements describes the difference between nominal and real
GDP?
A. Real GDP includes only goods; nominal GDP includes goods and services.
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B. Real GDP is measured using constant base-year prices; nominal GDP is measured
using current prices.
C. Real GDP is equal to nominal GDP less the depreciation of the capital stock.
10. If production remains the same and all prices double, then real GDP
12. If production remains the same and all prices double relative to the base year, then the
GDP deflator is
A. 1/4.
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B. 1/2.
C. 1.
D. 2.
If 1995 is the base year, what is the GDP deflator for 2000?
A. 0
B. between 0 and 1
C. 1
D. greater than 1
14. To obtain the net domestic product (NDP), start with GDP and subtract
A. depreciation.
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contributions.
A. depreciation.
A. 10 percent
B. 25 percent
C. 70 percent
D. 95 percent
B. measures the price of a basket of goods and services that constantly changes as the
composition of consumer spending changes.
C. measures the amount of money that it takes to produce a fixed level of utility.
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D. is one of the many statistics in the National Income Accounts.
18. Suppose that the typical consumer buys one apple and one orange every month. In the
base year 1986, the price for each was $1. In 1996, the price of apples rises to $2, and the
price of oranges remains at $1. Assuming that the CPI for 1986 is equal to 1, the CPI for
1996 would be equal to
A. 1/2.
B. 1.
C. 3/2.
D. 2.
The correct answer is C. The CPI measures the change in the price
of the typical consumer's basket of goods. Since the price of the
basket was $2 in 1986, and it is $3 in 1996, the CPI for 1996 is
equal to 3/2. See Section 2-2.
A. 0.
B. 1/2.
C. 1.
D. 2.
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doubled between 1995 and 2000, the 2000 CPI will equal 2. See
Section 2-2.
20. Which of the following statements about the CPI and the GDP deflator is true?
A. The CPI measures the price level; the GDP deflator measures the production of an
economy.
B. The CPI refers to a base year; the GDP deflator always refers to the current year.
D. The GDP deflator takes the price of imported goods into account; the CPI does not.
The correct answer is C. For a discussion of the CPI and the GDP
deflator, see Section 2-2.
21. All other things equal, if the price of foreign-made cars rises, then the GDP deflator
22. General Motors increases the price of a model car produced exclusively for export to
Europe. Which U.S. price index is affected?
A. The CPI
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The correct answer is B. The GDP deflator is affected because the
cars are produced domestically. The CPI does not change because
the cars are not consumed domestically. See Section 2-2.
23. Which of the following events will cause the unemployment rate to increase?
B. A proportionally equal increase in the labor force and the number of unemployed
workers
C. An increase in the labor force with no change in the number of employed workers
25. Suppose that a factory worker turns 62 years old and retires from her job. Which
statistic is not affected?
A. Number of unemployed
B. Unemployment rate
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C. Labor force
The correct answer is A. The factory worker willingly leaves her job
so she is not considered to be unemployed. See Section 2-3.
26. Suppose that the size of the labor force is 100 million and that the unemployment rate
is 5 percent. Which of the following actions would reduce the unemployment rate the most?
C. 3 million people join the labor force and they all get jobs.
D. 10 million people join the labor force and half of them get jobs.
28. Suppose that a Canadian citizen crosses the border each day to work in the United
States. Her income from this job would be counted in
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A. U.S. GNP and Canadian GNP.
29. Suppose that an Italian working in the United States renounces his Italian citizenship
and is granted U.S. citizenship. Which of the following will happen?
Chapter 3:
A. decreasing.
B. constant.
C. increasing.
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D. subject to wide fluctuations.
2. If a production function has two inputs and exhibits constant returns to scale, then
doubling both inputs will cause the output to
A. reduce by half.
C. double.
D. quadruple.
3. If the supplies of capital and labor are fixed and technology is unchanging, then real
output is
A. fixed.
B. determined by demand.
C. uncertain.
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4. If a production function has the property of diminishing marginal product, then doubling
A. 1
B. 5
C. 10
D. 20
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By how much does the marginal product of labor decrease as labor input increases from 1 to 2
and from 2 to 3?
A. 0
B. 1
C. 2
D. 3
7. Euler's theorem implies that if a production function exhibits constant returns to scale
The answer is A. Euler's theorem states that if each factor is paid its
marginal product, then the sum of these factor payments equals
output. This implies that economic profit is zero. See Section 3-2 for
a more detailed explanation of Euler's theorem.
8. If a firm with a constant returns to scale production function pays all factors their marginal
products, then
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D. economic and accounting profit are both positive.
10. A competitive firm hires labor until the marginal product of labor equals the
A. real wage.
C. price of output.
D. capital/labor ratio.
11. A competitive firm rents capital until the marginal product of capital equals the
A. real wage.
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B. rental price of capital.
C. price of output.
D. capital/labor ratio.
C. depreciation.
D. corporate taxes.
13. Suppose that a major natural disaster destroys a large part of a country's capital stock but
miraculously does not cause anybody bodily harm. What will happen to the real wage rate?
B. It will rise.
C. It will fall.
A. a.
B. 1 - a.
The correct answer is B. Since the real wage equals the marginal
product of labor (MPL), payments to labor (L) equal MPL * L. As
shown in Section 3-2, the MPL of the above production function
equals (1 - a)Y/L. Therefore payments to labor equal (1 - a)Y and (1
- a) is the fraction of income spent in payments to labor.
16. In a closed economy, the supply of goods and services must be equal to
A. consumption.
B. consumption + investment.
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The correct answer is C. As explained in Section 3-3, in a closed
economy, the supply of goods and services is allocated among three
uses--consumption, investment, and government purchases.
17. Suppose that a consumer has a marginal propensity to consume of 0.7. If this consumer earns
an extra $2, her consumption spending would be expected to increase by
A. $0.60.
B. $0.70.
C. $1.40.
D. $1.70.
18. Suppose that a consumer has a marginal propensity to consume of 0.8. If this consumer
receives and extra $2 of disposable income, her saving would be expected to increase by
A. $0.40.
B. $0.80.
C. $1.20.
D. $1.60.
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B. A car dealer stores some of this year's models for next year.
20. Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to
Williams. The total net investment from these transactions is
A. zero.
B. 1 house.
C. 2 houses.
D. 3 houses.
21. If the real interest rate rises, the quantity of investment demanded
A. will fall.
C. will rise.
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22. The real interest rate is equal to the nominal interest rate minus
A. accounting profit.
B. economic profit.
C. taxes.
D. inflation.
23. Choose the pair of words that best completes this sentence: Investment depends on the
________ interest rate because higher inflation will ________ the value of the dollars with which
the firm will repay the loan.
A. real, increase
B. nominal, increase
C. real, decrease
D. nominal, decrease
A. private saving.
B. public saving.
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The correct answer is C. In equilibrium, the supply of loanable funds
must equal the demand. In a closed economy, the demand for
loanable funds is investment and the supply is the sum of private
and public saving. Thus, investment must equal private saving plus
public saving. See Section 3-4.
A. income - consumption.
A. income - consumption.
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D. income - consumption - government spending - taxes.
28. In a closed economy, with total output and taxes fixed, if government spending rises
A. consumption falls.
D. investment falls.
29. In a closed economy with total income fixed, a reduction in taxes will cause consumption
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30. Suppose that there is a positive shock to investment demand: that is, at every interest rate, the
desired amount of investment rises. In a closed economy with the national saving fixed, the real
interest rate will
A. fall.
B. remain constant.
C. rise.
31. According to the simple macroeconomic model presented in Chapter 3, which of the
following will not be caused by an increase in government spending?
B. Decrease in consumption
C. Decrease in investment
32. In a closed economy with output fixed, an increase in government spending matched by an
equal increase in taxes will
A. increase consumption.
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C. increase investment.
33. In a closed economy with fixed output, an increase in government spending without any
change in taxes will lead to a(n)
34. In the simple macroeconomic model of Chapter 3, a decrease in taxes will shift the
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C. savings curve to the left.
C. reduction in taxes.
36. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate
the supply and demand for goods and services is
A. government spending.
B. consumption.
C. taxes.
A. It is a means of production.
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B. It is a unit of account.
C. It is a store of value.
D. It is a medium of exchange.
2. One purpose of money is to transfer purchasing power from the present into the future.
This function of money is called
A. store of value.
B. index of inflation.
C. medium of exchange.
D. unit of account.
3. One purpose of money is to provide the terms in which prices are quoted and debts are
recorded. This function of money is called
A. store of value.
B. index of inflation.
C. medium of exchange.
D. unit of account.
4. One purpose of money is to be the item we use to buy and sell things. This function of
money is called
A. store of value.
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B. index of inflation.
C. medium of exchange.
D. unit of account.
5. Of all of the following that could be used as money, which would be most likely to be
characterized as fiat money?
A. Chocolate bars
B. Silver jewelry
C. Gum wrappers
D. Salt
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7. M2 does not include
A. currency.
C. traveler's checks.
D. demand deposits.
D. quantity of money.
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10. According to the quantity equation, which of the following might happen if the money
supply increases?
11. Consider an economy where the money supply is growing at 7 percent per year and
velocity is constant. Which of the following statements about real GDP growth and the
inflation rate could be true?
12. Consider an economy where the only goods traded are coconuts and pineapples. Last
year, 100 coconuts were sold at $1 apiece, and 200 pineapples were sold at $2.50 apiece. If
the money supply was $100, what was velocity?
A. 30
B. 15
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C. 6
D. 5
13. Which component of the quantity equation is assumed constant by the quantity theory
of money?
14. The quantity theory of money states that if the money supply doubles and output is
constant, prices will
A. fall by half.
C. double.
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15. The difference between the nominal interest rate and the real interest rate is
A. inflation.
B. taxes.
C. seignorage.
D. hyperinflation.
The correct answer is A. The real interest rate (r) and the nominal
interest rate (i) are related by the equation i = r + inflation. The
difference between the two interest rates is inflation. See Section 4-
4.
16. The Fisher equation states that a 1 percent rise in the rate of inflation causes a 1
percent rise in the
C. money supply.
D. number of transactions.
The correct answer is B. The Fisher equation states that the nominal
interest rate is the sum of the real interest rate and inflation. Since
the real interest rate is determined by savings and investment, a 1
percent rise in the inflation rate will cause a 1 percent rise in the
nominal interest rate. See Section 4-4.
17. The ex ante real interest rate differs from the ex post real interest rate only when
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The correct answer is D. The ex ante real interest rate is equal to
the nominal interest rate minus expected inflation and the ex post
real interest rate equals the nominal interest rate minus actual
inflation. They are equal if actual inflation equals expected inflation.
See Section 4-4.
A. If inflation is higher than the real interest rate, then the nominal interest rate must
be negative.
B. If inflation is higher than the nominal interest rate, then the real interest rate must
be negative.
C. If the nominal interest rate is higher than the real interest rate, then inflation must
be positive.
D. If the nominal interest rate is higher than inflation, then the real interest rate must
be positive.
The correct answer is A. The nominal interest rate is just the sum of
inflation and the real interest rate. See Section 4-4.
The correct answer is D. Since the real interest rate is equal to the
nominal interest rate minus the inflation rate, it was equal to 5
percent in year 1 and -5 percent in year 2. Between year 1 and year
2, it decreased by 10 percent. See Section 4-4.
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20. The expected rate of inflation does not influence the
A. hyperinflation.
B. seignorage.
C. income taxes.
D. sales taxes.
22. Suppose that the price level has risen but the government has not collected any
seignorage. Which of the following might have happened?
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23. When the government raises revenue by printing money, it imposes an "inflation tax"
because the
A. inflation rate.
A. lower the demand for real balances because the real interest rate will rise.
B. lower demand for real balances because the nominal interest rate will rise.
C. increase the demand for real balances because the real interest rate will fall.
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D. increase the demand for real balances because the nominal interest rate will rise.
26. The expected future money supply does not have an effect on
27. Choose the pair of words that best completes this sentence: The nominal interest rate is
the sum of the ex ante real interest rate and the _________ inflation rate, and real money
balances are a function of the ___________ interest rate.
A. expected; nominal
B. actual; nominal
C. actual; real
D. expected; real
The correct answer is A. The nominal interest rate is the sum of the
ex ante real interest rate and the expected inflation rate. Real
money balances depend on the opportunity cost of holding money
which is the nominal interest rate. See Section 4-5.
28. If an individual is to hold lower money balances on average, she must make more
frequent trips to the bank to withdraw money. This inconvenience of reducing money
holding is called
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A. a menu cost.
B. a shoeleather cost.
C. an inflation tax.
D. seignorage.
29. One effect of an unexpected rise in inflation is that wealth is redistributed from
A. borrowers to lenders.
B. lenders to borrowers.
D. government to firms.
A. The money that people hold loses value due to the inflation tax.
B. People hold smaller real balances and so have to make more frequent trips to the
bank.
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31. One possible benefit from inflation is:
33. According to the classical dichotomy, which of these magnitudes is affected by monetary
policy?
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D. The rate of growth of real GDP
Chapter 5:
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2 Consider the following table
Consumption of foreign goods and services 100
Consumption of domestic goods and services 900
Investment of foreign goods and services 20
Investment of domestic goods and services 180
Government purchases of foreign goods and services 0
Government purchases of domestic goods and services 500
Exports 100
Based on the data, what are total imports?
A. 0
B. 120
C. 1,000
D. 1,580
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3 Consider the following table
Consumption of foreign goods and services 100
Consumption of domestic goods and services 900
Investment of foreign goods and services 20
Investment of domestic goods and services 180
Government purchases of foreign goods and services 0
Government purchases of domestic goods and services 500
Exports 100
Based on the data, what are net exports?
A. -20
B. 0
C. 120
D. 1,580
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4 If net exports are positive, which of the following is false?
A. S - I is negative.
C. NX is positive.
The correct answer is C. Net capital outflow must always equal the
balance of trade. If net capital outflow is positive, there must be a
trade surplus. This means that net exports are positive. See
Section 5-1.
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6 In a small open economy, the interest rate is determined by the
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7 In a small open economy, which interest rate equals the world
interest rate?
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8 If a Canadian investor buys one million dollars worth of stock in
an American company, how does this transaction appear in the
national income accounts of the United States?
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foreign investment. Since a foreigner is buying American assets,
this appears as a decrease in U.S. net capital outflow.
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9 Consider the following data on the Transalpinian economy
Y = 1,000
C = 700
G = 150
I = 250 - 10r*
The world interest rate is 5 percent. What are net exports of
Transalpinia?
A. 50
B. -50
C. 150
D. -150
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10 Consider the following data on the Transalpinian economy
Y = 1,000
C = 650
G = 200
I = 250 - 20r*
The world interest rate is 7.5 percent. How does the world
interest rate have to change to make net exports zero?
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A. It has to rise by 5 percent.
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11 In the small open economy model of Chapter 5, if a country
begins in a position of balanced trade, what happens when the
government increases taxes?
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12 Which of the following characterizes the U.S. economy since
2001?
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A. Government budget deficit and negative net capital outflow
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13 Which of the following did not contribute to an increase in
government saving in the 1990's?
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14 In the small open economy model of Chapter 5, starting from
balanced trade, an increase in the world interest rate from a fiscal
expansion abroad leads to which of the following?
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15 The price of one currency in terms of another currency, such
as 150 yen for $1, is an example of
C. purchasing-power parity.
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16 If the nominal exchange rate is $1 equals 150 Japanese yen,
and a Big Mac costs $2 in the U.S. and 300 yen in Japan, then
the real exchange rate of U.S. Big Macs for Japanese Big Macs is
A. 1.
B. 2.
C. 150.
D. 300.
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17 If a country's real exchange rate falls (depreciates), then
The correct answer is A. If the real exchange rate falls, exports are
relatively less expensive to foreigners and imports are relatively
more expensive to the domestic population. This means that
exports will rise and imports will fall. Therefore, net exports will
rise. See Section 5-3.
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18 Choose the pair of words that best complete this sentence: If
government purchases increase, national saving will ________
and the equilibrium real exchange rate will _______.
A. fall; fall
B. fall; rise
C. rise; rise
D. rise; fall
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19 In the model of Chapter 5, if the government prevented the
import of foreign cars, then, in the resulting equilibrium, net
exports would
The answer is B. This policy raises the demand for net exports and
causes the real exchange to rise. Net exports remain constant,
because saving and investment do not change. See Section 5-3.
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20 If the United States has an inflation rate of 10 percent, Great
Britain has an inflation rate of 12 percent, and the United States
dollar has a nominal appreciation against the British pound of 3
percent, then the real appreciation of the United States dollar
against the British pound is
A. 1 percent.
B. 13 percent.
C. 15 percent.
D. 25 percent.
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21 The law of one price applied to the international marketplace
is called
A. arbitrage.
D. purchasing-power parity.
A. 0.5
B. 1
C. 2
D. 2.5
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23 Assume that the nominal exchange rate for the euro is .75
euros per dollar. Suppose that a Volkswagen Golf costs 10,000
euros in Germany, while it costs $12,000 in the United States.
What is the real exchange rate?
A. 0.75
B. 0.9
C. 1.2
D. 1.1
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The answer is B. See Section 5-3 for an explanation of how to
calculate the real exchange rate.
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24 Suppose that a country experiences inflation while the nominal
exchange rate and the price level in its trading partner remain
unchanged. What will happen to the country's real exchange rate
and to net exports?
A. The real exchange rate will fall; net exports will rise.
B. The real exchange rate will fall; net exports will fall.
C. The real exchange rate will rise; net exports will fall.
D. The real exchange rate will rise; net exports will rise.
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25 Which of the following causes a decrease in the real exchange
rate?
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D. A decrease in taxes
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26 If the Japanese government wants to reduce its trade surplus
with the United States, which measure would achieve this?
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27 Consider the following table
Domestic inflation: 5%
Foreign inflation: 6%
Change in nominal exchange rate: 3%
Based on the data, what is the change in the real exchange rate?
A. 2 percent
B. 3 percent
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C. 5 percent
D. 8 percent
1. If the rate of unemployment is neither rising nor falling, then the number of people
finding jobs must equal the number of people
A. unemployed.
2. If the rate of job finding rises, the natural rate of unemployment will
A. remain constant.
B. increase.
C. decrease.
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3. Suppose that 2 percent of the employed lose their jobs each month (s = 0.02) and 38
percent of the unemployed find a job each month (f = 0.38). Then, the steady-state rate of
unemployment is
A. 2 percent.
B. 5 percent.
C. 16 percent.
D. 36 percent.
4. The unemployment rate is 10 percent. The rate of job separation is 5 percent. How high
does the rate of job finding have to be to keep the unemployment rate constant?
A. 10 percent
B. 45 percent
C. 50 percent
D. 90 percent
5. Unemployment insurance
A. frictional unemployment.
B. seasonal unemployment.
C. teenage unemployment.
D. cyclical unemployment.
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The correct answer is A. Since unemployment insurance programs
reduce the economic hardships associated with unemployment, they
increase the amount of frictional unemployment. See Section 6-2.
6. The unemployment caused by the time that it takes to match workers and jobs is called
A. frictional unemployment.
C. structural unemployment.
D. wage rigidity.
8. Which of the following policies would reduce the amount of frictional unemployment?
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transition of workers from declining to growing industries, thereby
reducing frictional unemployment. See Section 6-2.
A. fall.
B. remain constant.
C. rise.
10. When the real wage is above the level that equilibrates supply and demand, then the
quantity of labor supplied
11. The unemployment resulting from wage rigidity and job rationing is called
C. structural unemployment.
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D. insiders versus outsiders.
12. A teenager is not able to find a job because the legal minimum wage is higher than the
wage that firms are willing to offer.This situation is an example of
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. efficient unemployment.
A. collective bargaining.
B. wage rigidity.
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D. the real wage is above its market-clearing level.
15. Which of the following is not a cause for real wage rigidity?
A. Minimum-wage laws
B. Unemployment insurance
C. Union power
D. Efficiency wages
16. The unemployment caused by unions and by the threat of unionization is an instance of
A. structural unemployment.
C. efficiency wages.
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D. insiders are fired and outsiders are hired.
18. Efficiency wage theories claim that firms may pay high real wages in order to
A. structural unemployment.
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C. The long-term unemployed make up only a small fraction of the unemployed.
D. Most people who become unemployed remain unemployed for a long time.
A. frictional unemployment.
B. structural unemployment.
22. Suppose that 130 people are unemployed for part of a given year; 120 are unemployed
for 1 month, 10 are unemployed throughout the year; what percentage of total months of
unemployment is attributable to the long-term unemployed?
A. 7.7 percent
B. 10 percent
C. 13 percent
D. 50 percent
B. some individuals may want a job but have become discouraged and stopped looking
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for one.
C. some individuals claim to be unemployed when they are not looking very seriously
for a job.
The answer is B. If there are individuals who want jobs, but are
discouraged and no longer looking for them, actual unemployment
will be higher than measured unemployment. See Section 6-4.
24. Discouraged workers who want jobs, but have stopped looking for jobs are
A. frictionally unemployed.
25. Many economists believe that the rise in European unemployment is caused by
D. economic inequality.
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