Deck 7: The Economy at Full Employment

Question 1

The production function describes the relationship between the quantities of which two variables?

A) inputs and output
B) output and profit
C) output and revenue
D) inputs and cost

Answer 1

inputs and output

Question 2

When deciding whether to hire another worker, firms look at how the additional worker will affect:

A) productivity.
B) costs.
C) profit.
D) revenues.

Answer 2

profit.

Question 3

A tax on labor causes a smaller drop in equilibrium employment when:

A) the labor demand curve is flat than when it is steep.
B) the labor demand curve is steep than when it is flat.
C) the labor supply curve is steep than when it is flat.
D) the labor supply curve is flat than when it is steep.

Answer 3

the labor supply curve is steep than when it is flat.

Question 4

The phenomenon where private spending increases after a decrease in government spending is known as:

A) Ricardian equivalence.
B) income effect.
C) crowding in.
D) crowding out.

Question 5

The relationship between the quantity of output produced and the quantity of inputs used to produce it is called:

A) the stock of capital.
B) crowding out.
C) technological knowledge.
D) the production function.

Question 6

Which of the following would be counted as part of the stock of capital?

A) the lettuce on a salad bar
B) a newly discovered mineral deposit
C) the copy machines in a photocopying shop
D) all of the above

Question 7

The level of full- employment output in an economy increases as:

A) the supply of labor increases.
B) the natural rate of unemployment decreases.
C) the stock of capital increases.
D) all of the above.

Question 8

Which of the following would not cause an increase in output?

A) an increase in the capital stock
B) an increase in labor
C) an increase in productivity
D) All of the above would cause an increase in output.

Question 9

Which of the following is considered capital?

A) a computer purchased for a secretary
B) a factory a company builds to produce other output
C) a tractor produced by John Deere
D) all of the above

Question 10

According to the classical economists, the economy:

A) requires fine- tuning to reach full employment.
B) is self- correcting.
C) can never deviate from full employment.
D) will never be at full employment.

Question 11

In order to estimate the level of full- employment output, economists typically:

A) subtract cyclical unemployment from the level of potential output.
B) estimate potential output when there is no idle capital stock.
C) estimate potential output when the unemployment rate is equal to the cyclical rate of unemployment.
D) estimate potential output when the unemployment rate is equal to the natural rate of unemployment.

Question 12

Which of the following must be true when it is observed that government spending is causing crowding out?

A) The investment spending is increasing.
B) The consumption or investment spending is decreasing.
C) The consumption spending is increasing.
D) The government spending is decreasing.

Question 13

Recall Application 2, "A Nobel Laureate Explains Why Europeans Work Less than U.S. workers or the Japanese," to
answer the following questions:
According to the application, the effective tax on labor for the U.S. is about:

A) 54 percent.
B) 65 percent.
C) 40 percent.
D) 15 percent.

Question 14

The entire short- run production function shifts upward if:

A) productivity decreases.
B) the quantity of labor increases.
C) the stock of capital increases.
D) diminishing returns are close to zero.

Question 15

Figure 7.3
Refer to Figure 7.3. The classical economists argued the wage rate will _______ from _______ if the demand for labor changes from D' to D.

A) fall; $12 to $10
B) not change; $12
C) rise; $10 to $12
D) not change; $10

Question 16

If the production function is Y = 3K, then an increase in capital (K) by 1 unit would

A) increase Y by 3 units.
B) increase L by 3 units.
C) increase Y by 0 units.
D) decrease Y by 3 units.

Question 17

Recall Application 3, "Can Labor Market Policies Account for the Great Depression," to answer the following questions:
According to the application, what was observed during the Great Depression that contradicts the basic real business cycles?

A) Gold prices decreased during the great depression, but the basic real business cycle models predicted it to increase.
B) Real wages decreased during the Great Depression, but the basic real business cycle models predicted it to increase.
C) Unemployment rates decreased during the great depression, but the basic real business cycle models predicted it to increase.
D) Real wages increased during the Great Depression, but the basic real business cycle models predicted it to decline.

Question 18

The reduction in consumption, investment or net exports that occurs when government spending increases is known as:

A) division of output.
B) crowding out.
C) Ricardian equivalence.
D) Say's law.

Question 19

What happens to the labor supply curves in the U.S. and Canada when Canadian workers migrate to the United States?

A) The labor supply curve shifts to the right in the U.S. and to the left in Canada.
B) The labor supply curve shifts to the left both in the U.S. and in Canada.
C) The labor supply curve shifts to the left in the U.S. and to the right in Canada.
D) The labor supply curve shifts to the right both in the U.S. and in Canada.

Question 20

If the classical models provided an accurate description of the workings of the economy during the Great Depression, then:

A) the Great Depression would have been much deeper.
B) the Great Depression would have lasted much shorter.
C) the Great Depression would have occurred exactly the way it did.
D) the Great Depression would have lasted much longer.

Question 21

The horizontal axis of the production function typically measures:

A) marginal product.
B) output.
C) inputs.
D) costs.

Question 22

What event led economists to question the usefulness of classical models in explaining how the true economy works?

A) World War I
B) the Revolutionary War
C) World War II
D) the Great Depression

Question 23

Critics of the real business cycle theory find it difficult to understand:

A) why the unemployment rate is always high.
B) what makes potential output change over time.
C) why technological changes affect labor productivity.
D) how adverse changes in technology are so frequent.

Question 24

Recall Application 2, "A Nobel Laureate Explains Why Europeans Work Less than U.S. workers or the Japanese," to
answer the following questions:
According to the application, as the U.S. population ages, the U.S. needs to

A) decrease taxes.
B) make changes in Social Security.
C) increase benefits.
D) lower the retirement age.

Question 25

Because a tax on labor makes labor more expensive and raises the marginal cost of hiring workers, it follows that:

A) nominal wages rise.
B) unemployment rises.
C) real wages rise.
D) all of the above.

Question 26

Recall Application 2, "A Nobel Laureate Explains Why Europeans Work Less than U.S. workers or the Japanese," to
answer the following questions:
From the application, we can infer that one way to encourage Americans to further increase their hours worked per year would be to:

A) decrease living standards.
B) decrease the effective tax rates experienced by workers.
C) increase the effective tax rates experienced by workers.
D) move to France.

Question 27

When constructing a production function between labor and output, which is drawn on the Y- axis?

A) technology
B) capital
C) labor
D) output

Question 28

Figure 7.2
Refer to Figure 7.2. Which of the following can change the equilibrium wage rate from $8 to $7?

A) The value people put on their leisure time increases.
B) The productivity of workers decreases.
C) The value of what firms produce increases.
D) all of the above

Question 29

What happens to the equilibrium wage rate in the US and Canada when more US and Canadian workers migrate to the Europe?

A) The real wage in Canada and the US will increase.
B) The real wage in Canada will increase while the real wage in the US will decrease.
C) The real wage in Canada and the US will decrease.
D) The real wage in Canada will decrease while the real wage in the US will increase.

Question 30

A tax on labor causes a larger drop in equilibrium wages when:

A) the labor supply curve is flat than when it is steep.
B) the labor demand curve is flat than when it is steep.
C) the labor supply curve is steep than when it is flat.
D) the labor demand curve is steep than when it is flat.

Question 31

The production function described in the chapter assumes that with a fixed capital stock, increases in the labor input results in increases in output at a decreasing rate. This relationship between labor and output is known as:

A) increasing returns.
B) diminishing returns.
C) constant returns.
D) effective returns.

Question 32

What happens to the equilibrium wage rate in the US and Canada when more American workers migrate to the Canada?

A) The real wage in Canada will increase while the real wage in the US will decrease.
B) The real wage in Canada and the US will increase.
C) The real wage in Canada will decrease while the real wage in the US will increase.
D) The real wage in Canada and the US will decrease.

Question 33

The real wage is the wage rate to employees adjusted for:

A) changes in labor laws.
B) changes in worker benefits.
C) changes in the minimum wage laws.
D) changes in the price level.

Question 34

When the economy experiences a recession, the

A) labor demand decreases and the equilibrium wage drops.
B) labor demand increases and the equilibrium wage drops.
C) the supply decreases and the equilibrium wage decreases.
D) the supply increases and the equilibrium wage increases.

Question 35

The production function is Y = 2K^0.5L^0.5. If there are 121 units of capital and 225 units of labor, aggregate output is:

A) 330 units.
B) 240 units.
C) 120 units.
D) 165 units.

Question 36

Figure 7.4
From Figure 7.4, crowding out occurs between:

A) points A and B.
B) points B and C.
C) points C and D.
D) points D and E.

Question 37

In macroeconomics, the term "classical" refers to a school of economics that believed that

A) the economy is never at full employment.
B) over a short period of time, wages and prices will adjust to bring the economy back to full employment.
C) over a short period of time, wages alone and not prices, will adjust to bring the economy back to full employment.
D) over along period of time, wages and prices will adjust to bring the economy back to full employment.

Question 38

If Y is total output, K is the capital stock and L is the total labor input stock, which of the following represents a production function?

A) Y = f(L,K)
B) K = f(L,Y)
C) L = f(Y, K)
D) all of the above

Question 39

Because GDP must be divided among competing demands in the economy, we should expect:

A) increases in consumption to reduce net exports when the economy is in full employment.
B) increases in government expenditure to reduce private investment when the economy is in full employment.
C) increases in imports to reduce exports when the economy is in full employment.
D) increases in private saving to reduce private investment when the economy is in full employment.

Question 40

Figure 7.2
Refer to Figure 7.2. The equilibrium wage rate is $ _______ and the equilibrium number of people employed is _______ million people.

A) 7; 140
B) 12; 200
C) 8; 140
D) 8; 150

Question 41

Figure 7.2
Refer to Figure 7.2. At wage rate $12, there is a _______ of labor equal to _______ million people.

A) surplus; 40
B) shortage; 40
C) shortage; 90
D) surplus; 90

Question 42

In a production function that is graphed with output on the y- axis and labor on the x- axis, an increase in the labor stock is illustrated as:

A) an upward shift in the production function.
B) an upward movement along the production function.
C) a downward movement along the production function.
D) a downward shift in the production function.

Question 43

The production function is Y = 3KL. If there are 10 units of capital and 50 units of labor, aggregate output is:

A) 500.
B) 35010.
C) 3500.
D) 1500.

Question 44

Recall Application 1, "The Black Death and the Living Standards in Old England," to answer the following questions:
According to the application, the higher real wages in England during the 1350s through the 1550s was caused by:

A) the Industrial Revolution.
B) Columbus' discovery of America.
C) the bubonic plague.
D) the Spanish inquisition.

Question 45

When constructing a production function between labor and output, which of the following is held constant?

A) the stock of labor
B) the stock of capital
C) the level of technology
D) B and C are both correct.

Question 46

According to the book, the estimate of the natural rate of unemployment in the U.S. in recent years is between:

A) 5.0 - 6.5 percent.
B) 4.0 - 5.5 percent.
C) 6.0 - 7.5 percent.
D) 0- 10 percent.

Question 47

If the production function is Y = 3K, then an increase in labor (L) by one unit would

A) decrease Y by 3 units.
B) increase K by 3 units.
C) increase Y by 0 units.
D) increase Y = 3 units.

Question 48

Figure 7.2
Refer to Figure 7.2. At wage rate $7, there is a _______ of labor equal to _______ million people.

A) shortage; 40
B) surplus; 40
C) surplus; 10
D) shortage; 10

Question 49

If the real business cycle theory were correct, then the recession that the U.S. experienced in 2008 was caused by:

A) a war in the Middle East.
B) a sharp increase in the price of oil.
C) a negative shock in technology.
D) a positive shock in technology.

Question 50

Suppose that the U.S. has an open economy and is currently at full employment. When the country ends its war in Afghanistan and cuts military spending, crowding in will take the form of:

A) an increase in investment spending.
B) an increase in net exports.
C) an increase in consumption spending.
D) All of the above are correct.

Question 51

According to the real business cycle theory, an adverse change in technology:

A) increases the productivity of labor, which causes real wages and output to increase.
B) decreases the productivity of labor, which causes real wages and output to increase.
C) decreases the productivity of labor, which causes real wages to fall and output to decline.
D) increases the productivity of labor, which causes real wages and output to decline.

Question 52

A tax on labor results in a/an

A) increase in labor demand.
B) decrease in labor demand.
C) increase in labor supply.
D) decrease in labor supply.

Question 53

The production function described in the chapter assumes that:

A) neither the capital and the labor stock is fixed.
B) both capital and the labor stock is fixed.
C) the labor stock is fixed.
D) the capital stock is fixed.

Question 54

A tax on labor causes a smaller drop in equilibrium wages when:

A) the labor demand curve is steep than when it is flat.
B) the labor supply curve is flat than when it is steep.
C) the labor demand curve is flat than when it is steep.
D) the labor supply curve is steep than when it is flat.

Question 55

In the market for labor, the buyers of labor are:

A) the resource owners.
B) the firms.
C) the workers.
D) both B and C are correct.

Question 56

In an open economy, crowding out occurs when an increase in government spending results in:

A) an increase in investment spending.
B) an increase in public saving.
C) a decrease in net exports.
D) an increase in consumption spending.

Question 57

When constructing a production function between labor and output, which of the following is not held constant?

A) the level of technology
B) the stock of capital
C) the stock of labor
D) B and C are both correct.

Question 58

In a production function that is graphed with output on the y- axis and labor on the x- axis, an increase in the capital stock is illustrated as:

A) an upward shift in the production function.
B) a downward movement along the production function.
C) an upward movement along the production function.
D) a downward shift in the production function.

Question 59

Which of the following cannot be true when it is observed that government spending is causing crowding out?

A) The government spending is decreasing.
B) The consumption spending is decreasing.
C) The net exports spending is decreasing.
D) The investment spending is decreasing.

Question 60

Classical economists assumed:

A) there is never full employment.
B) the wage rate cannot adjust to equate the quantity of labor demanded with quantity of labor supplied.
C) the wage rate adjusts to maintain labor market equilibrium.
D) involuntary unemployment exists.

Question 61

Which of the following would not be considered part of the stock of capital?

A) a new computer used in an office
B) a new factory
C) on- the- job training
D) a desk used in a secretary's office

Question 62

An increase in the number of migrant workers into the country will shift the labor _______ curve to the _______ .

A) demand; right
B) supply; right
C) supply; left
D) demand; left

Question 63

What was observed about labor markets during the Great Depression that was not explained by classical models? This was also what most models developed after the Great Depression tried to explain.

A) persistent unemployment
B) persistent growth
C) persistent inflation
D) persistent equilibrium

Question 64

Recall Application 1, "The Black Death and the Living Standards in Old England," to answer the following questions:
From the application, the decline in the real wages of laborers in England from the time after the plague until the 1800s implies that during this period:

A) there was rapid technological progress.
B) there was a significant increase in the population.
C) there was a large increase in the capital stock.
D) there was a large decline in the population.

Question 65

Full- employment output is:

A) the level of output that is produced when there is no voluntary unemployment.
B) the level of output that is produced when the labor market is in equilibrium.
C) the level of output that is produced when the unemployment rate is zero.
D) the level of output that is produced when there is no idle capital stock.

Question 66

If the price of airline tickets rises during holidays, what will happen to the demand for flight attendants?

A) It will increase and the equilibrium wages paid to flight attendants will fall.
B) It will decrease and the equilibrium wages paid to flight attendants will fall.
C) It will increase and the equilibrium wages paid to flight attendants will rise.
D) It will decrease and the equilibrium wages paid to flight attendants will rise.

Question 67

Figure 7.1
Please refer to Figure 7.1. Suppose the economy is at point D. A health pandemic that results in the loss of the lives to countless workers will:

A) move the economy to point B.
B) move the economy to point C.
C) move the economy to point A.
D) keep the economy at point D.

Question 68

A tax on labor results in a shift in the labor

A) demand curve to the left.
B) demand curve to the right.
C) supply curve to the left
D) supply curve to the right.

Question 69

If the labor supply curve were vertical, a tax on labor will cause:

A) a lower equilibrium wage only.
B) a lower equilibrium wage and employment.
C) a lower equilibrium employment. only
D) a higher equilibrium wage and employment.

Question 70

The labor supply curve is based on the decision of:

A) firms on how many workers to hire.
B) workers on how many hours to work and how much to enjoy as leisure.
C) firms on how many goods and services to produce.
D) workers on how much income to spend.

Question 71

Figure 7.4
From Figure 7.4, crowding in did not occur between:

A) points A and B.
B) points B and C.
C) points C and D.
D) points D and E.

Question 72

What does an upward- sloping labor supply curve mean?

A) Workers choose to work less when wages are high.
B) An increase in the wage leads to an increase in the quantity of labor supplied.
C) An increase in wages causes a large income effect.
D) A higher wage rate results in a higher income for all workers.

Question 73

The labor demand curve is:

A) upward sloping, because a lower real wage entices workers to work less.
B) downward sloping, because a lower real wage entices firms to hire more workers.
C) upward sloping, because a lower real wage entices firms to hire more workers.
D) downward sloping, because a lower real wage entices workers to work less.

Question 74

The idea that wages and prices adjust freely and quickly to changes in the demand and supply is adopted and defended by:

A) Keynesian economists.
B) demand- side economists.
C) fine- tuning economists.
D) classical economists.

Question 75

According to the real business cycle theory, technological advances:

A) increase the productivity of labor, which causes real wages and output to decline.
B) increase the productivity of labor, which causes real wages and output to increase.
C) increase the productivity of labor, which causes real wages to increase and output to decline.
D) decrease the productivity of labor, which causes real wages and output to increase.

Question 76

Recall Application 1, "The Black Death and the Living Standards in Old England," to answer the following questions:
According to the application, which economist made the observation all the way back in the 19th century that maladies such as plagues would cause a temporary increase in living standard?

A) David Ricardo
B) Adam Smith
C) John Maynard Keynes
D) Thomas Robert Malthus

Question 77

Recall Application 1, "The Black Death and the Living Standards in Old England," to answer the following questions:
From the application, the lack of growth in the real wages of laborers in England from the 1200s to the 180s implies that during this period:

A) there was a large increase in the capital stock.
B) there was rapid technological improvement.
C) there was a large decline in the population.
D) there was little technological improvement.

Question 78

When a profit- maximizing firm makes a decision to employ a worker, that decision is based on:

A) the individual contribution the worker makes to profit.
B) the total output produced by the firm.
C) how much output the worker can produce.
D) none of the above

Question 79

Figure 7.1
Please refer to Figure 7.1. Suppose the economy is at point A. An increase in the capital stock will:

A) move the economy to point B.
B) move the economy to point C.
C) move the economy to point D.
D) keep the economy at point A

Question 80

Figure 7.1
Please refer to Figure 7.1. The production function that passes through points A and B exhibits

A) diminishing returns to labor.
B) no diminishing returns.
C) diminishing returns to labor and capital.
D) diminishing returns to capital.