Question 1

The natural rate of unemployment:
A) equals zero.
B) equals the actual rate of unemployment when cyclical unemployment equals zero.
C) equals the cyclical plus the actual rate of unemployment.
D) fluctuates around the actual rate of unemployment.

Accepted Answer

The natural rate of unemployment is the rate of unemployment that exists when the economy is at its potential output and there is no cyclical unemployment. Therefore, it is equal to the actual rate of unemployment when cyclical unemployment is zero.

Question 2

A binding minimum wage results in:
A) higher wages for those who were working prior to the minimum wage implementation.
B) an increase in structural unemployment.
C) a decrease in the amount of cyclical unemployment.
D) lower actual unemployment rates since higher wages encourage more people to enter the labour force.

Accepted Answer

A binding minimum wage increases the cost of labor for firms, which can result in a decrease in the demand for labor and an increase in structural unemployment. The higher wages for those already employed may lead to a decrease in cyclical unemployment, but the overall effect on unemployment is unclear. Higher wages may also discourage some individuals from seeking employment, which can offset any positive effects on unemployment rates.

Question 3

The sum of frictional and structural unemployment is the:
A) actual unemployment level.
B) cyclical amount of unemployment.
C) natural rate of unemployment.
D) amount of unemployment in an economy during a recession.

Accepted Answer

The natural rate of unemployment includes both frictional and structural unemployment. Therefore, the sum of these two types of unemployment is equal to the natural rate of unemployment.

Question 4

In periods of unexpected inflation:
A) borrowers benefit since they repay their loans in dollars with lower real value.
B) lenders benefit since they are repaid in dollars with a higher real value.
C) neither borrowers nor lenders are affected by the inflation rate since their nominal interest rate stays the same.
D) lenders benefit since the nominal interest rate does not change.

Accepted Answer

In periods of unexpected inflation, the value of money decreases. As a result, borrowers benefit since they repay their loans in dollars with lower real value. For example, if a borrower took out a loan at a fixed nominal interest rate, and the inflation rate unexpectedly increases, then the repayment value of the loan decreases in real terms, and the borrower effectively repays less than they borrowed.

Question 5

High rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing.This example illustrates _____ costs.
A) shoe-leather
B) menu
C) efficiency-wage
D) unit-of-account

Accepted Answer

Shoe-leather costs refer to the increased time and effort spent by individuals to conduct transactions in periods of high inflation. The example given in the question describes people spending more time trying to make transactions and finding ways to protect the value of their money, which is a clear example of shoe-leather costs. Menu costs refer to the costs businesses incur to change prices due to inflation, efficiency-wage refers to paying employees above the market rate to improve their productivity and motivation, and unit-of-account costs refer to the confusion and uncertainty caused by inflation in measuring the real value of goods and services.

Question 6

Analysts believe that generous unemployment benefits in Europe are associated with:
A) low unemployment rates in Europe.
B) high unemployment rates in Europe.
C) weak labour unions in Europe.
D) relatively constant levels of unemployment in Europe.

Accepted Answer

Generous unemployment benefits may disincentivize individuals from actively seeking work and may also make it less expensive for companies to lay off employees, potentially leading to higher unemployment rates in Europe. This has been a point of controversy and debate among policymakers and economists.

Question 7

Anticipated inflation affects:
A) borrowers only.
B) lenders only.
C) all aspects of the economy.
D) only business firms involved in investment spending.

Accepted Answer

Anticipated inflation affects all aspects of the economy, including consumers, businesses, investors, lenders, and borrowers. It affects the purchasing power of money, interest rates, and the costs of goods and services, leading to changes in investment and spending decisions by individuals and businesses.

Question 8

The natural rate of unemployment changes when:
A) the cyclical unemployment changes.
B) the actual rate of unemployment changes.
C) labour market institutions change.
D) government policies remain the same.

Accepted Answer

The natural rate of unemployment is the rate of unemployment that exists when the economy is at potential output or full employment. It is determined by structural factors such as technology, demographics, and labour market institutions. Therefore, changes in labour market institutions such as changes in minimum wage laws or collective bargaining agreements can cause the natural rate of unemployment to change. Cyclical unemployment and actual rate of unemployment are determined by the overall state of the economy and do not affect the natural rate. Government policies can also affect the natural rate by changing labour market institutions or affecting structural factors, so D is incorrect.

Question 9

When disinflation occurs:
A) the natural rate of unemployment rises.
B) and inflationary expectations do not change,an economy may have a recession.
C) and inflationary expectations do not change,unemployment rates will fall.
D) and inflationary expectations do not change aggregate output will rise.

Accepted Answer

Disinflation refers to a decrease in the rate of inflation. If inflation is decreasing but inflationary expectations are not changing, then it is possible for the economy to experience a recession as the decrease in spending can lead to a decrease in aggregate demand. This is consistent with answer choice B. None of the other choices accurately reflect the impact of disinflation.

Question 10

An efficiency wage:
A) can be secured only with the help of a labour union.
B) is one that causes greater frictional unemployment.
C) is offered by an employer to encourage workers to work harder.
D) results in a less productive work force.

Accepted Answer

An efficiency wage is a wage rate offered by an employer that is higher than the equilibrium wage rate, and it is designed to encourage workers to work harder and perform better. This can lead to increased productivity and higher profits for the employer. While it may result in some increased frictional unemployment if workers are unwilling to leave the firm due to the higher wage rate, it generally results in a more productive workforce rather than a less productive one. Unionization is not necessary for an efficiency wage to be offered.

Question 11

Unit-of-account costs refer to the problem associated with high inflation rates that:
A) cause people to expend extra effort to reduce their holdings of money.
B) result in increased costs associated with necessary changes in the list price of items.
C) make money a less reliable unit of measurement.
D) decrease the costs associated with holding less money.

Accepted Answer

High inflation makes money a less reliable unit of measurement because it distorts the value of money over time, complicating financial planning and accounting.

Question 12

Alex expects the inflation rate to be 4%.If Alex borrows money at a nominal interest rate of 5%,his real interest rate is:
A) greater than the nominal interest rate.
B) less than the nominal interest rate.
C) equal to the nominal interest rate.
D) negative.

Accepted Answer

The real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate. In this case, the nominal interest rate is 5% and the expected inflation rate is 4%, so the real interest rate would be 1% (5% - 4%). Since the real interest rate is lower than the nominal interest rate, Alex is actually paying more in terms of purchasing power than he is technically borrowing.

Quiz 8: Unemployment and Inflation

The natural rate of unemployment:

A binding minimum wage results in:

The sum of frictional and structural unemployment is the:

In periods of unexpected inflation:

High rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing.This example illustrates _____ costs.

Analysts believe that generous unemployment benefits in Europe are associated with:

Anticipated inflation affects:

The natural rate of unemployment changes when:

When disinflation occurs:

An efficiency wage:

Unit-of-account costs refer to the problem associated with high inflation rates that:

Alex expects the inflation rate to be 4%.If Alex borrows money at a nominal interest rate of 5%,his real interest rate is: