2. 2
1. Stagflation is defined as the “double trouble” of
higher inflation combined with an increase in
a. the money supply.
b. unemployment.
c. the price level.
d. corporate profits.
B. Stagflation occurs when the economy is
stagnating and inflating at the same time.
3. 3
2. The labor force is defined as
a. individuals over the age of 16 years
b. non-institutionalized individuals over the age of
16 years.
c. non-institutionalized individuals over the age of
16 years who are working.
d. non-institutionalized individuals over the age of
16 years who are working or looking for work.
D. The definition of unemployment is what it
is because of how the government defines
it. D is simply the government’s definition.
4. 4
3. Individuals are counted as unemployed if they have
a. no job.
b. no job and are not looking.
c. no job but looked for a job at least once in the
last four weeks.
d. no job but looked for a job at least once in the
last six months.
C. By definition, a person has to be actively seeking
gainful employment to be considered
unemployed. The four weeks is the government’s
time frame when seeking employment.
5. 5
4. The labor force participation rate is defined as the
a. percent of population above the age of sixteen
years.
b. ratio of the number in the labor force to the
population of working age.
c. ratio of the number employed to the population of
working age.
d. civilian labor force divided by the total labor force.
B. This is the government’s definition
of labor force participation rate.
6. 6
5. In the 1970s, as more women entered the
labor force, the result was that the
a. labor force participation rates for females
increased.
b. labor force participation rates for
females decreased.
c. unemployment rate declined.
d. labor force declined.
A. The ratio of the number women in the
labor force increased in relation to the
population of working age people.
7. 7
6. Workers temporarily unemployed but who
normally find jobs quickly are called
a. frictionally unemployed.
b. cyclically unemployed.
c. seasonally unemployed.
d. structurally unemployed.
A. Frictional unemployment is the normal job
search type of unemployment. Recent high
school grads and college grads are examples
of workers who are frictionally unemployed.
8. 8
7. Workers who are unemployed because they
lack the skills needed by employers are called
a. frictionally unemployed.
b. cyclically unemployed.
c. seasonally unemployed.
d. structurally unemployed.
D. Improvements in capital and technology lead to
more jobs, but the jobs may remain vacant if the
people in the work force do not have the training
and skills to meet the requirements for the jobs.
9. 9
8. Which of the following occupations would least
likely to be subjected to seasonal employment?
a. Lifeguard.
b. Department store Santa.
c. Ronald McDonald clown.
d. Easter Bunny.
C. Lifeguards, Santa's, and the Easter Bunny are only
employed during certain seasons. A Ronald
McDonald clown can be employed during any season.
10. 10
9. Which of the following occupations would most
likely be subject to seasonal unemployment?
a. Automobile mechanic.
b. Appliance salesperson.
c. Television repair-person.
d. Farm worker.
D. Farming is very subject to the seasons,
the other possible answers are not
subject to changes in the seasons.
11. 11
10. Full unemployment is considered as being equal to
the level that combines all of the following except
a. frictional unemployment.
b. cyclical unemployment.
c. seasonal unemployment.
d. structural unemployment.
B. Full employment includes frictional,
seasonal, and structural unemployment,
but not cyclical unemployment.
12. 12
11. Most economists believe the current
level of full employment is represented
by an unemployment rate between
a. 2 and 4%.
b. 4 and 5%.
c. 5 and 6%.
d. 7 and 9%.
C. Making up that 5% and 6% are everyone
who is included in frictional, seasonal, and
structural unemployment. Even in the best
of times there will be certain people who
will be actively seeking employment.
13. 13
12. What effect would the enactment of compulsory
unemployment insurance laws have on
unemployment rates? They would
a. increase unemployment rates.
b. decrease unemployment rates.
c. have no impact on unemployment rates.
d. decrease the number of discouraged workers.
A. The easier it is to remain unemployed,
the longer people will take to find a job.
14. 14
13. Which of these is likely to increase
the most in a severe recession?
a. Frictional unemployment.
b. Seasonal unemployment.
c. Structural unemployment.
d. Cyclical unemployment.
D. Cyclical unemployment is the type of
unemployment that is most susceptible to
changes in the economy. Certain jobs are
effected by economic downturns before others.
For example, carpenters are normally the
among the first to experience unemployment
when the economy goes into a recession.
15. 15
14. When workers are overqualified for
their current jobs or can find work
only part-time, we refer to this as
a. unemployed.
b. discouraged workers.
c. not in labor force.
d. underemployed.
D. A person with a doctorate degree who can only
find a job flipping burgers at McDonalds is an
example of underemployment.
16. 16
15. Which of the following about discouraged
workers would be correct? They are
a. counted in the labor force.
b. not counted in the labor force or
unemployment numbers.
c. counted in the labor force and the
unemployment numbers.
d. not counted in the labor force but are
counted in the unemployment numbers.
B. One of the weaknesses in using the unemployment
rate as an indicator of how well the economy is doing
is that it does not consider the discouraged worker.
17. 17
16. Inflation is defined as a(n)
a. increase in some prices.
b. increase in the price of a specific commodity
(or service).
c. sustained increase in the general price level.
d. sustained increase in the price of a specific
commodity (or service).
C. Some prices always increase because of the
workings of the price mechanism. Only
when the general level of prices increase
over time can we say that we have inflation.
18. 18
17. A sustained increase in the
general price level is called
a. deflation.
b. inflation.
c. disinflation.
d. hyperinflation.
B. A sustained decrease in the average price
level is called deflation. Disinflation is a
reduction in the rate of inflation.
Hyperinflation is a very high rate of inflation.
19. 19
18. Demand-pull inflation is induced by
a. inward shift in the aggregate demand curve.
b. inward shift in the aggregate supply curve.
c. outward shift in the aggregate supply and
demand curves.
d. outward shift in the aggregate demand
curve.
D. If you draw a downward sloping demand
curve and an upward sloping supply curve on
a piece of paper and then move the demand
curve to the right, you will see that prices will
increase. This is called demand-pull inflation.
20. 20
19. Cost-push inflation is typically induced by
a. inward shift in the demand curve.
b. inward shift in the aggregate supply and
demand curves.
c. outward shift in the demand curve.
d. inward shift in the supply curve.
D. If you draw a downward sloping demand
curve and an upward sloping supply curve on
a piece of paper and then move the supply
curve to the left, you will see that prices will
increase. This is called cost-push inflation.
21. 21
20. Cost-push inflation typically follows which of
the following patterns?
a. Aggregate supply decreases that ultimately
causes the price level to increase.
b. Aggregate demand and aggregate supply
both decreases that ultimately causes the
price level to increase.
A. A factor that can cause a shift in supply is a change in
costs. As costs increases the supplier cannot not afford to
supply as much at every price level as used to be the case.
A leftward shift of the aggregate supply curve will cause
prices to increase. This is called cost-push inflation.
22. 22
21. Demand-pull inflation typically follows which
of the following patterns?
a. Aggregate demand decreases that
ultimately causes the price level to increase.
b. Aggregate demand increases that ultimately
causes the price level to increase.
c. Aggregate demand and aggregate supply
both increases that ultimately causes the
price level to increase.
B. Because the downward sloping demand curve
is moving to the right along an upward
sloping supply curve, the increase in demand
will pull the general price level upward.
23. 23
22. The Consumer Price Index measures the cost of
a. all goods and services produced in the U.S.
economy.
b. all goods produced in the U.S. economy.
c. a fixed market basket of consumer goods and
services produced in the U.S. economy.
C. The Consumer Price Index does not measure
the prices of all goods and services, but only a
particular basket of goods and services. As
times change and consumers buying habits
change, what goes into this basket changes.
24. 24
23. If the inflation rate is 14% per year,
and your nominal income increases by
13% per year, your real income
a. declines slightly.
b. increases slightly.
c. increases substantially.
d. does not change.
A. With inflation increasing 1% more than
your income increases, your buying
power, or real income, goes down by 1%.
25. 25
24. A reduction in the rate on inflation is known as
a. deflation.
b. disinflation.
c. inflation.
d. hyperinflation.
B. If inflation in year one is 6% and 5% in
year two, we experience disinflation. We still
have inflation in year two, but the inflation
rate is lower than in the previous year.
26. 26
25. If the deflation rate is 10 percent per year,
and your nominal wage rate increases by
11 percent per year, your real wage will
a. increase slightly.
b. increase substantially.
c. not change.
d. decrease slightly.
B. With a deflation rate of 10% (a fall in the
average price level) and a raise in pay of
11%, your real income would rise by 21%.
27. 27
26. The real rate of interest can best be expressed as the
a. nominal interest rate minus the real rate.
b. inflation rate minus the nominal interest rate.
c. nominal interest rate minus the inflation rate.
d. inflation rate minus the real interest rate.
C. For example, in the previous question,
your buying power went down by 1%
because 14% minus 13% equals -1%.
28. 28
27. If the annual inflation rate is 5% per
year, and the nominal interest rate is 6%,
the real interest rate is ______ per year.
a. 1%
b. 5%
c. 6%
d. 11%
A. If you pay 6% to borrow money, but you repay
the loan in dollars that have decreased in value by
5%, the true cost to you for the loan is only 1%.
29. 29
28. Which of the following would best define interest?
a. Dollar amount paid to lenders to forego
consumption.
b. Payment for abstinence.
c. Dollar amount paid by borrowers to lenders to
forego present consumption.
d. Dollar amount paid by lenders to borrowers to
forego present consumption.
C. People with money can either spend it or save it. In
order to forego present consumption, these people
need an incentive. The more interest they can earn on
their savings, the more incentive there is to save.
30. 30
29. Megan recently borrowed money to purchase
an automobile at a nominal interest rate of 8%
per year. If the inflation rate is 6% per year,
what is the real rate of interest on the loan?
a. 6% per year.
b. 8% per year.
c. 4% per year.
d. 2% per year.
D. By paying back an 8% loan with
dollars that have been deflated by 6%,
the true cost of the loan is only 2%.
31. 31
30. If future price changes were perfectly
anticipated by both borrowers and lenders,
what would happen to the real rate of interest
in the future if the price level changed? Real
interest rate would
a. increase.
b. decrease.
c. decrease by the amount of the price increase.
d. not change.
D. With future price changes exactly
anticipated by both borrowers and
lenders, interest rates would increase at
the same level as prices, and therefore
the real interest rate would not change.
32. 32
31. Because of the way discouraged workers and part-
time employment are reflected in the official
statistics, the official unemployment rate
a. overstates the unemployment problem.
b. understates the unemployment problem.
c. truly reflects the level of unemployment.
d. overstates the size of the labor force.
B. A discourage worker is one who has
looked for work for a long time, would still
like to have a job, but has quit looking for
work because of discouragement.
33. 33
32. An individual with a Ph.D. in physics,
who can only find employment in a pizza
parlor, would normally be considered as
a. a discouraged worker.
b. underemployed.
c. overemployed.
d. unemployed.
B. This person is still considered fully
employed, but is underemployed because
their job is well below their qualifications.
34. 34
33. If the CPI is 220 one year and 210 the
next, the annual rate of inflation is
measured by the CPI is approximately
a. -4.5%.
b. -2.3%.
c. 220%.
A. The rate of increase or decrease between two numbers is
the difference between the two numbers divided by the
original number. The difference between 220 and 210 is -
10. Negative 10 divided by 220 is equal to a negative .045,
which is -4.5%. The answer is a negative number because
the CPI has decreased in this example and not increased.
35. 35
34. If the CPI is 109 one year and 112 the
next, the annual rate of inflation is
measured by the CPI is approximately
a. 1.45%.
b. 2.75%.
c. 3.6%.
B. The difference between the two
numbers divided by the original
number is 3 / 109 = .0275 or 2.75%.
36. 36
35. Which of the following events ushered in
the Great Depression of the 1930s?
a. The Smoot Hawley Tariff.
b. A decrease in the money supply.
c. An increase in taxes.
d. all of the above.
D. The build up of excessive inventory due to
business greed led to the unemployment problem
in the early 1930s, but it was these three policies of
the government after unemployment became a
problem that actually ushered in the depression.
37. 37
36. What was the purpose of the Smoot-
Hawley Tariff in the early 1930s?
a. To raise money.
b. Encourage international trade.
c. To help bring down inflation.
d. To increase the price of imports.
D. The thinking was that if we raised the price of
imports Americans would buy more domestic
products. However, the higher prices led to a
decrease in buying power which made the
unemployment problem worse.
