Chapter 26 Business Cycles, Unemployment, and Inflation

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Chapter 26 - Business Cycles, Unemployment, and Inflation Chapter 26 Business Cycles, Unemployment, and Inflation Multiple Choice Questions 1. Recurring upswings and downswings in an economy's real GDP over time are called: A. recessions.

B. business cycles. C.

output yo-yos. D. total product oscillations.

2. In the United States, business cycles have occurred against a backdrop of a long-run trend of: A. declining unemployment.

B. stagnant productivity growth. C.

rising real GDP. D. rising inflation.

4. As it relates to economic growth, the term long-run trend refers to: A. the long-run increase in the relative importance of durable goods in the U.S.

economy. B. the long-term expansion or contraction of business activity that occurs over 50 or 100 years.

C. fluctuations in business activity that average 40 months in duration. D.

fluctuations in business activity that occur around Christmas, Easter, and so forth. 6. The industries or sectors of the economy in which business cycle fluctuations tend to affect output the most are: A.

military goods and capital goods. B. services and nondurable consumer goods.

C. clothing and education. D.

capital goods and durable consumer goods. 26-1 Chapter 26 - Business Cycles, Unemployment, and Inflation 7. During a severe recession, we would expect output to fall the most in: A.

the health-care industry. ... more. less.

B. the clothing industry. C. agriculture. D. the construction industry. 8. The phase of the business cycle in which real GDP declines is called: A. the peak. B. an expansion. C . a recession. D. the trough. 9. The phase of the business cycle in which real GDP is at a minimum is called: A. the peak. B. a recession. C. the trough. D. the pits. 11. The production of durable goods varies more than the production of nondurable goods because: A. durables purchases are nonpostponable. B. durables purchases are postponable. C. the producers of nondurables have monopoly power. D. producers of durables are highly competitive. 12. A recession is a period in which: A. cost-push inflation is present. B. nominal domestic output falls. C. demand-pull inflation is present. D. real domestic output falls. 26-2 Chapter 26 - Business Cycles, Unemployment, and Inflation 13. In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates? A. expansion B. recession C. peak D. trough 17. An unexpected increase in total spending will cause an increase in GDP: A. if prices are sticky. B. if prices are fully flexible. C. regardless of whether prices are sticky or fully flexible. D. only if prices are stuck in the long term. Answer the next question(s) on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. 21. Refer to the above information. The labor force in Scoob is: A. 95 million. B. 102 million. C. 105 million. D. 145 million. 22. Refer to the above information. The unemployment rate in Scoob is: A. 2.5 percent. B. 3.2 percent. C. 5.0 percent. D. 6.9 percent. 27. To be officially unemployed a person must: A. be in the labor force. B. be 21 years of age or older. C. have just lost a job. D. be waiting to be called back from a layoff. 26-3 Chapter 26 - Business Cycles, Unemployment, and Inflation 34. The presence of discouraged workers: A. increases the size of the labor force, but does not affect the unemployment rate. B. reduces the size of the labor force, but does not affect the unemployment rate. C. may cause the official unemployment rate to understate the true amount of unemployment. D. may cause the official unemployment rate to overstate the true amount of unemployment. 35. Part-time workers are counted as: A. unemployed and therefore the official unemployment rate may overstate the level of unemployment. B. unemployed and therefore the official unemployment rate may understate the level of unemployment. C. fully employed and therefore the official unemployment rate may overstate the level of unemployment. D. fully employed and therefore the official unemployment rate may understate the level of unemployment. 36. The natural rate of unemployment: A. is fixed over time. B. is found by adding the cyclical and structural unemployment rates. C. may change from one decade to another. D. cannot be influenced by public policy. 37. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is: A. 3 percent. B. 6 percent. C. 7 percent. D. 53 percent. 38. The natural rate of unemployment is the: A. unemployment rate experienced at the depth of a depression. B. full-employment unemployment rate. C. unemployment rate experienced by the least-skilled workers in the economy. D. unemployment rate experienced by the most-skilled workers in the economy. 26-4 Chapter 26 - Business Cycles, Unemployment, and Inflation 41. The unemployment rate is the: A. ratio of unemployed to employed workers. B. number of employed workers minus the number of workers who are not in the labor force. C. percentage of the labor force that is unemployed. D. percentage of the total population that is unemployed. 43. The official unemployment rate: A. involves people over 16 years of age who are not currently seeking employment. B. is the ratio of unemployed to employed workers. C. is the percentage of the labor force that is unemployed. D. is the percentage of the total population that is not working. 45. 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: A. secular unemployment. B. cyclical unemployment. C. structural unemployment. D. frictional unemployment. 46. Cyclical unemployment results from: A. a deficiency of spending on goods and services. B. the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy. C. the everyday dynamics of a free labor market. D. technological change. 48. A college graduate using the summer following graduation to search for a job would best be classified as: A. not officially a member of the labor force. B. a part of structural unemployment. C. a part of cyclical unemployment. D. a part of frictional unemployment. 26-5 Chapter 26 - Business Cycles, Unemployment, and Inflation 49. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called: A. frictional unemployment. B. structural unemployment. C. cyclical unemployment. D. compositional unemployment. 52. When the U.S. economy has achieved full employment, the unemployment rate is between: A. 5 and 6 percent. B. 4 and 5 percent. C. 3 and 4 percent. D. 2 and 3 percent. 54. Wait unemployment and search unemployment are both types of: A. cyclical unemployment. B. hidden unemployment. C. frictional unemployment. D. structural unemployment. 55. The type of unemployment associated with recessions is called: A. frictional unemployment. B. structural unemployment. C. cyclical unemployment. D. seasonal unemployment. 56. Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result: A. the official unemployment rate will fall. B. the official unemployment rate will rise. C. the official unemployment rate will remain unchanged. D. the size of the labor force will increase. 26-6 Chapter 26 - Business Cycles, Unemployment, and Inflation 57. The government agency responsible for collecting and reporting unemployment data is the: A. Bureau of Labor Statistics. B. Bureau of Unemployment. C. Bureau of Economic Analysis. D. Bureau of Economic Research. 58. At the economy's natural rate of unemployment: A. the economy achieves its potential output. B. there is only a relatively small amount of cyclical unemployment. C. only frictional unemployment exists. D. only structural unemployment exists. 59. Search unemployment and wait unemployment are types of: A. frictional unemployment. B. structural unemployment. C. deficient-demand unemployment. D. cyclical unemployment. 60. In the depth of the Great Depression, the unemployment rate in the United States was about: A. 15 percent. B. 33 percent. C. 25 percent. D. 40 percent. 26-7 Chapter 26 - Business Cycles, Unemployment, and Inflation Answer the next question(s) on the basis of the following information about a hypothetical economy: 61. Refer to the above information. The unemployment rate is: A. 18.8 percent. B. 12.5 percent. C. 16.7 percent. D. 25 percent. 62. Refer to the above information. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by: A. 0 percentage points. B. 2 percentage points. C. 4 percentage points. D. 6 percentage points. 66. A large negative GDP gap implies: A. an excess of imports over exports. B. a low rate of unemployment. C. a high rate of unemployment. D. a sharply rising price level. 70. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is: A. $360 billion. B. $660 billion. C. $320 billion. D. $20 billion. 26-8 Chapter 26 - Business Cycles, Unemployment, and Inflation 80. Okun's law: A. measures the tradeoff between the rate of inflation and the rate of unemployment. B. indicates the number of years it will take for a constant rate of inflation to double the price level. C. quantifies the relationship between nominal and real incomes. D. shows the relationship between the unemployment rate and the size of the negative GDP gap. 81. 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: A. Taylor's rule. B. Okun's law. C. Say's law. D. the Coase theorem. 82. Unemployment rates in the United States: A. tend to be lower than rates in Europe, but higher than rates in Japan. B. tend to be lower than rates in Japan, but higher than rates in Europe. C. tend to be lower than rates in Europe and Japan. D. tend to be higher than rates in Europe and Japan. 83. Inflation means that: A. all prices are rising, but at different rates. B. all prices are rising and at the same rate. C. prices in the aggregate are rising, although some particular prices may be falling. D. real incomes are rising. 90. Given the annual rate of inflation, the "rule of 70" allows one to: A. determine whether the inflation is demand-pull or cost-push. B. calculate the accompanying rate of unemployment. C. determine when the value of a real asset will approach zero. D. calculate the number of years required for the price level to double. 92. If the rate of inflation is 12 percent per year, the price level will double in about: A. 4 years. B. 6 years. C. 10 years. D. 12 years. 26-9 Chapter 26 - Business Cycles, Unemployment, and Inflation 26-10 95. Demand-pull inflation: A. occurs when total spending in the economy is excessive. B. is measured differently than cost-push inflation. C. can be present even during an economic depression. D. is also called "hyperinflation." 96. "Too much money chasing too few goods" best describes: A. the GDP gap. B. demand-pull inflation. C. the inflation premium. D. cost-push inflation. 113. Cost-push inflation: A. reduces real output. B. increases real output. C. reduces the unemployment rate. D. raises the natural rate of unemployment. 115. Cost-of-living adjustment clauses (COLAs): A. invalidate the "rule of 70." B. apply only to demand-pull inflation. C. increase the gap between nominal and real income. D. tie wage increases to changes in the price level. 116. During a period of hyperinflation: A. creditors gain because their loans are repaid with dollars of higher value. B. people tend to hold goods rather than money. C. income is redistributed away from borrowers. D. the real value of the national currency rises. 117. Inflation is undesirable because it: A. arbitrarily redistributes real income and wealth. B. invariably leads to hyperinflation. C. usually is accompanied by declining real GDP. D. reduces everyone's standard of living.

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