Deck 11: The Business Cycle, Unemployment, and Inflation

Question 1

The peak and the trough represent the turning points of a business cycle.

Answer 1

True

Question 2

Concerning the business cycles of the U.S., the average recovery has been shorter and less pronounced than the average recession.

Answer 2

False

Question 3

The leading economic indicators are variables, such as the money supply and building permits, that change before the real GDP changes, and thus signal when a turning point in the economy may occur.

Answer 3

True

Question 4

Most economists believe that a change in the stock of capital goods is the immediate determinant of domestic output and employment.

Question 5

Regarding output and employment, those industries that produce consumer durables and capital goods are most sensitive to fluctuations in the economy.

Question 6

The output and employment in the automobile industry tends to be more sensitive to fluctuations in the economy than in the medical care industry.

Question 7

The unemployment rate is the number of people unemployed divided by the total population of the nation.

Question 8

Some part-time workers work less than a full week because they cannot find a suitable full-time job. Therefore, the official unemployment statistics tend to overestimate the extent of unemployment in the economy.

Question 9

Because the official unemployment rate does not include discouraged workers, the actual degree of unemployment in the economy tends to be underestimated.

Question 10

For the U.S., frictional unemployment has generally been a more serious problem than structural unemployment.

Question 11

Structural unemployment is unemployment caused by skills that do not match what employers require or from being geographically separated from job opportunities.

Question 12

An auto worker who is laid off because the economy enters a recession would be frictionally unemployed.

Question 13

Unemployment insurance provides weekly benefits to workers who have been laid off or who have lost their jobs for reasons other than misconduct or a labor dispute.

Question 14

Economists call the level of unemployment at which there is no frictional unemployment the natural rate of unemployment.

Question 15

The natural rate of unemployment is the economists' notion of full employment.

Question 16

An "overheated economy" is one for which the actual rate of unemployment exceeds the natural rate of unemployment.

Question 17

If Japanese companies provide lifetime employment for workers, the natural rate of unemployment would rise in Japan.

Question 18

Europe's approach to labor markets has generally been to protect low-skilled workers by keeping their wages relatively high and penalizing firms for laying them off.

Question 19

Compared to Europe, U.S. labor market policies are more laissez faire and leave labor market arrangements to employers and employees.

Question 20

Compared to Europe, in the United States we see weaker unions, a lower minimum wage, and substantial competition for low-skilled jobs from foreign workers and immigrants.

Question 21

For the consumer price index to register inflation, the prices of all goods and services must increase over a period of time.

Question 22

Deflation suggests that the rate of inflation is moderating-say, from 6 percent to 4 percent to 2 percent.

Question 23

The most frequently cited indicator of inflation is the gross domestic product deflator.

Question 24

Cost-push inflation would occur if productivity increases faster than wages.

Question 25

Demand-pull inflation implies that too much money chases too few goods.

Question 26

Unanticipated inflation benefits lenders at the expense of borrowers.

Question 27

Suppose a bank lends money at what it feels is an appropriate rate of interest for the level of anticipated inflation, but the actual rate of inflation turns out to be much higher than anticipated. Therefore, the bank will realize an unexpected gain in wealth.

Question 28

Nominal income is the actual number of dollars of income received during a year. Real income is the actual number of dollars received, adjusted for any change in price.

Question 29

The real interest rate equals the nominal interest rate plus the inflation rate.

Question 30

When the federal government indexed the personal income tax system in 1985, a taxpayer could be pushed into a higher tax bracket only if her real income increased.

Question 31

Looking at the business cycle, the low point of real GDP, just before it begins to turn up, is called the recession.

Question 32

Economists use leading economic indicators to determine whether the economy is in a recession.

Question 33

Downsizing is an economic phenomenon that has been going on for centuries.

Question 34

Unemployment insurance was established in the United States as part of the Social Security Act.

Question 35

If the inflation rate is 4 percent and the nominal interest rate is 6 percent, then the real interest rate is 2 percent.

Question 36

The Big Mac Index shows the price of a Big Mac in different countries, stated in that country's currency.

Question 37

If interest rates fall, homeowners with conventional mortgages see a drop in their monthly payments.

Question 38

The low point of real GDP, just before it begins to turn up, is called the ______ of a business cycle.

A) recession
B) depression
C) peak
D) trough

Question 39

During the ______ stage of a business cycle, real GDP increases, industrial output expands, profits usually increase, and employment moves toward full employment.

A) peak
B) recovery
C) recession
D) trough

Question 40

The leading economic indicators do not include

A) the money supply
B) new orders for plant and equipment
C) building permits
D) the inflation rate

Question 41

______ are variables that change before the real GDP changes, and thus give a signal when a turning point in the economy may occur.

A) Leading economic indicators
B) Lagging economic indicators
C) Recession indicators
D) Depression indicators

Question 42

Many economists believe that a change in the ______ is the immediate determinant of domestic output and employment, and thus turning points in the business cycle.

A) total spending of the nation
B) taxes levied on businesses and households
C) nation's supply of capital goods
D) net exports of goods and services

Question 43

If the U.S. economy encounters a recession, which industry would likely reduce output by the greatest proportion?

A) automobiles
B) agriculture
C) medical care
D) clothing

Question 44

Purchases of consumer durable goods tend to decline by relatively large amounts during a recession because

A) buyers can usually postpone purchases of these goods
B) buyers can substitute nondurable goods for durable goods
C) the prices of durable goods decline substantially during a recession
D) the incomes of households decrease modestly during a recession

Question 45

If the U.S. economy encounters a recession, which industry would likely reduce output by the smallest proportion?

A) construction
B) farm equipment
C) freezers
D) legal services

Question 46

Suppose that of all adult Americans, 140 million are employed, 10 million are unemployed and actively seek jobs, 5 million are not in the labor force, and 10 million are part-time workers looking for full-time jobs. The unemployment rate equals

A) 4.4 percent
B) 5.5 percent
C) 6.7 percent
D) 7.3 percent

Question 47

The accuracy of the official unemployment rate is criticized because it

A) includes only those people who are over 24 years of age
B) counts as unemployed homemakers who are not actively seeking employment
C) counts as unemployed students who are not actively seeking employment
D) doesn't count as unemployed part-time workers who would like full-time jobs

Question 48

The actual degree of unemployment in the economy tends to be underestimated by the official unemployment rate because it

A) excludes discouraged workers who have given up trying to find work
B) includes discouraged workers who have given up trying to find work
C) includes only those workers who are at least 21 years of age
D) excludes only those workers who are at least 21 years of age

Question 49

______ is the unemployment that arises from normal labor turnover-that is, from people being "between jobs."

A) Structural unemployment
B) Disguised unemployment
C) Cyclical unemployment
D) Frictional unemployment

Question 50

______ is found quite often side by side with job vacancies, because the unemployed lack the skills required for newly created jobs.

A) Structural unemployment
B) Discouraged unemployment
C) Cyclical unemployment
D) Frictional unemployment

Question 51

A decline in total spending in the economy leads to

A) frictional unemployment
B) structural unemployment
C) cyclical unemployment
D) full employment

Question 52

The natural rate of unemployment is the sum of

A) frictional and structural unemployment
B) frictional and disguised unemployment
C) cyclical and structural unemployment
D) cyclical and full unemployment

Question 53

The natural rate of unemployment would decline if

A) unemployment compensation benefits were increased for laid-off workers
B) corporations downsize their production and administrative operations
C) the government decreases its purchases of aircraft and tanks
D) the number of young people in the labor force declines

Question 54

The unemployment rate for blacks is ________ that of whites.

A) about the same as
B) lower than
C) about twice
D) about three times

Question 55

High unemployment rates in Europe are believed to be due to all of the following government practices except

A) establishing numerous business regulations
B) providing generous welfare benefits and unemployment insurance
C) legislating relatively low employment taxes for employers
D) maintaining minimum wage rates which are above the market-equilibrium level

Question 56

Compared to Europe, labor markets in the U.S. are characterized by

A) weak unions
B) high welfare benefits
C) high penalties for firms that lay off workers
D) a high minimum wage rate

Question 57

Inflation occurs when

A) the purchasing power of money is increasing
B) some prices are increasing but other prices are decreasing
C) the average level of prices is increasing
D) the purchasing power of money remains unchanged

Question 58

A decrease in the index of leading economic indicators would suggest that the economy will likely

A) realize demand-pull inflation
B) realize cost-push inflation
C) head into an expansion
D) head into a recession

Question 59

A continuing decline in the average price level is known as

A) inflation
B) reflation
C) disinflation
D) deflation

Question 60

If the consumer price index rises, the

A) real income of households increases
B) value of the dollar increases
C) dollar will purchase additional goods and services
D) purchasing power of money declines

Question 61

If the consumer price index equaled 170 in 2010 and 173 in 2012, the rate of inflation between the two years would be

A) 0.9 percent
B) 1.8 percent
C) 2.4 percent
D) 3.0 percent

Question 62

Suppose that the consumer price index equaled 30 in 1960 and 170 in 2013. If you had $100 to buy some goods in 2013, you would have needed ______ in 1960 to buy the same amount of goods.

A) $12.88
B) $15.34
C) $17.64
D) $18.98

Question 63

Suppose that the consumer price index equaled 30 in 1960 and 180 in 2008. If a movie cost $1 to attend in 1960, how much would the same movie cost to attend in the prices of 2008?

A) $4
B) $5
C) $6
D) $7

Question 64

All of the following are limitations of the consumer price index except

A) its market basket fails to keep pace with the development of better products
B) it ignores the discounting of prices by merchants
C) it does not keep pace with changes in people's buying patterns
D) it applies to only consumers of 21 years of age or over

Question 65

Suppose that in the absence of inflation, a bank is willing to make a mortgage loan for $100,000 at an annual interest rate of 7 percent. If the bank expected the inflation rate to be 4 percent, however, the bank would charge the borrower an annual interest rate of

A) 3 percent
B) 6 percent
C) 9 percent
D) 11 percent

Question 66

All of the following groups are harmed by unanticipated inflation except

A) Social Security beneficiaries who have COLAs
B) banks that provide fixed-rate mortgage loans to households
C) the public who invests in fixed-return securities of the U.S. government
D) savers who place their funds in commercial banks

Question 67

In 1985, the U.S. government indexed the federal personal income tax system. With indexing, households are pushed into a higher tax bracket only if their nominal income

A) rises as fast as the rate of inflation
B) rises slower than the rate of inflation
C) rises faster than the rate of inflation
D) decreases by the amount of inflation

Question 68

Investors criticize the federal income tax system because they must pay taxes

A) on gains that merely reflect the effects of inflation
B) only on gains that exceed the effects of inflation
C) on losses as well as gains
D) on losses but not on gains

Question 69

Cost-push inflation would be the result of a(n)

A) increase in the economy's level of total spending
B) increase in the economy's level of employment
C) decrease in the economy's productivity
D) decrease in the resource prices of the economy

Question 70

Demand-pull inflation could be the result of

A) too many goods chasing too little money
B) buyers' spending on goods outrunning sellers' capacities to supply them
C) a decrease in the level of labor productivity
D) businesses raising their prices in response to cost increases

Question 71

A turning point of the business cycle is the

A) recession
B) depression
C) recovery
D) trough

Question 72

The economist's notion of full employment is the

A) natural rate of unemployment
B) structural rate of unemployment
C) cyclical rate of unemployment
D) frictional rate of unemployment

Question 73

Allison quit her job at Wal-Mart in Oklahoma and moved back in with her parents in Massachusetts. She is now looking for work as a cashier. Her type of unemployment is considered to be

A) cyclical
B) structural
C) discouraged
D) frictional

Question 74

Cyclical unemployment is fluctuating unemployment that coincides with the

A) employees' lack of skills
B) seasons
C) business cycle
D) stock market

Question 75

The purchases of which of the following goods is most sensitive to the business cycle?

A) a DVD player
B) a hamburger
C) a sweater
D) a pencil

Question 76

The Consumer Price Index

A) quickly adjusts when new products are developed
B) is based on a sampling of thousands of households and businesses
C) takes price discounting and quality changes into account
D) is believed by most economists to understate the true rate of inflation

Question 77

What is the main way that the U.S. government attempts to mitigate the costs of unemployment in the short run?

A) education and training programs
B) decreasing the prices of goods
C) unemployment insurance
D) raising income taxes on wealthy households

Question 78

What caused the collapse of the German economy after World War I?

A) hyperinflation due to large amounts of currency printed
B) too many returning soldiers taking jobs away from other people
C) low interest rates that caused too much investment
D) high business profits and racketeering

Question 79

Harold used to have a job bolting fenders to automobiles in a Ford assembly plant. Last year, Ford bought robots to do this job, and as a result, Harold was laid off. If all the other auto companies are also now using robots to bolt fenders onto automobiles, Harold is experiencing what type of unemployment?

A) structural
B) natural
C) frictional
D) cyclical

Question 80

Most economists believe that the natural rate of unemployment is between

A) 0% and 1%
B) 2% and 3%
C) 4% and 6%
D) 7% and 9%