CHAPTER 23: MEASURING A NATION’S INCOME
True/False
Indicate whether the statement is true or false.
?1.? The circular flow diagram describes all transactions between households and firms in a simple economy and shows the equality of expenditures and income. ANSWER:? T POINTS:?
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?2.? Gross domestic product includes most items produced and sold illicitly. ANSWER:? F POINTS:?
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?3.? Net national product is the total income of a nation’s residents minus losses from depreciation. ANSWER:? T POINTS:?
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?4.?
Disposable personal income is the income that households and unincorporated business have left after satisfying all their obligations to the government. It equals personal income minus personal taxes and certain non-tax payments to government. ANSWER:? T POINTS:?
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?5.? The purchase of new houses by households is included in the calculation of personal consumption expenditures of GDP. ANSWER:? F POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.? When GDP falls,
a. income and expenditure must both fall.
b. income and expenditure can both rise.
c. income must fall, but expenditure may rise or fall.
d. expenditure must fall, but income may rise or fall. ANSWER:? A POINTS:?
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?2.? Income equals expenditure because
a. firms always pay out all their revenue as income to someone.
b. each time a sale is made, there is a buyer and a seller.
c. households own the factors of production used to generate incomes.
d. All of the above are correct. ANSWER:? B POINTS:?
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?3.? If a province makes the production and sale of illicit drugs legal, then GDP a. must increase. b. must decrease.
c. wouldn't change.
d. may increase or decreas
e. ANSWER:? A POINTS:?
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?4.? When a government provides subsidies to encourage growth of small businesses, the subsidies would
a. be included in GDP because they are invested by businesses.
b. be included in GDP because they are a form of government spending.
c. not be included in GDP because they are transfer payments.
d. may or may not be included in GDP, depending on how the funds are used. ANSWER:? C POINTS:?
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?5.? Diesel fuel is
a. always considered a final good.
b. counted as an intermediate good if a company uses it to provide transportation
services.
c. counted as a final good if a farmer uses it to run a tractor to grow crops.
d. Both b and c are correct. ANSWER:? B POINTS:?
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?6.? Gross domestic product
a. is the market value of all final goods and services produced within a country in
a given period (usually a year)
b. is the income in the hands of individuals after deducting income taxes; income
available to households to spend and save
c. is the value of goods and services purchased by all levels of government — federal,
provincial, and local —in a given period
d. is the market value of all final goods and services produced by permanent residents
of a nation in a given time period ANSWER:? A POINTS:?
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?7.? Macroeconomics is that branch of economics that studies a. the conditions of individual markets
b. the influence of governments on individual markets
c. economy-wide phenomena
d. only the private sector of the economy ANSWER:? C POINTS:?
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?8.? Suppose that nominal GDP is $6,000 billion and real GDP is $3,000. What is the GDP price deflator? a. 125 b. 150 c. 200 d. 250 ANSWER:? C
POINTS:?
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?9.? The purchase of final goods and services by households is called a. investment
b. public sector expenditure
c. consumption
d. net exports ANSWER:? C POINTS:?
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?10.? Investment is the purchase of capital equipment, inventories, and a. structures b. non-durable goods c. depreciation d. import investment ANSWER:? A POINTS:?
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?11.? Transfer payments
a. are included in GDP because they are forms of income
b. are included in GDP because goods and services have been produced in the transfer
c. are NOT included in the GDP because goods and services have not been produced in
the transfer
d. are included in GDP because they represent the production of transfers of goods
and services to foreign countries ANSWER:? C POINTS:?
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?12.? Which of the following would be considered consumption expenditure? a. The Smiths buy a home built in 1990.
b. The federal government pays the salary of a captain in the Armed Forces.
c. The Hostlers buy a new car that was manufactured in Germany.
d. The government buys food for its armed forces. ANSWER:? C POINTS:?
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?13.? The method that measures GDP in relationship to the size of the population is called a. GNP b. worker GDP c. GDP per person d. capital GDP ANSWER:? C POINTS:?
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?14.? The components of GDP are a. C + I + G b. NX + G + C c. C + G + NX d. C + I + G + NX ANSWER:? D POINTS:?
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?15Suppose nominal GDP is $7700 and the GDP deflator is 110. Real GDP is
.? a . $7700 b. $7000 c. $847,000 d. $8470 ANSWER:? B POINTS:?
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Short Answer
?1.? What are the components of gross domestic product (GDP)? RESPONSE:? ANSWER:?
The components of GDP are: (1) consumption spending by households on goods and services, with the exception of purchases of new housing; (2) Investment spending on capital equipment, inventories, and structures, including household purchases of new housing; (3) government purchases or spending on goods and services by the local, provincial, and federal levels governments; and (4) net exports which is spending on domestically produced goods and services by foreigners (exports) minus spending on foreign goods and services by domestic resident (imports).
POINTS:?
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?2.? Differentiate between gross domestic product (GDP) and gross national product (GNP). RESPONSE:? ANSWER:?
GDP is the value of all final goods and services produced within a country in a given year; while GNP is the total income earned by a nation’s permanent residents or nationals (that is, Canadians). GNP differs from GDP by including income that citizens of the nation (Canada) earned aboard, and excluding income that foreigners earn in the particular country . in Canada).
POINTS:?
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?3.? Differentiate between real GDP and nominal GDP. RESPONSE:? ANSWER:?
Nominal GDP is the value of all final goods and services produced within a country in a year and valued at current prices; and real GDP is the GDP valued at constant base year prices.? Real GDP is not affected by changes in the level of prices, so it reflects only changes in the amounts being produced.
POINTS:?
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?4.? Explain why GDP is not considered a perfect measure of well- being? RESPONSE:? ANSWER:?
GDP is not considered a perfect measure of well-being because some of the factors that contribute to a good life are omitted.? These would include: leisure time, the quality of the environment, the distribution of income, and the production of goods and services that did not pas through the market (for example, housework done by the homemaker, and volunteer work)
POINTS:?
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?5.? How do economists measure economic growth? RESPONSE:? ANSWER:?
Economists measure economic growth as the percentage change in real GDP from one period to another. This is because changes in real GDP reflect only changes
CHAPTER 24: MEASURING THE COST OF LIVING
in the amounts being produced.
POINTS:?
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True/False
Indicate whether the statement is true or false.
?1.? The GDP deflator reflects the prices of goods and services bought by consumers ,?and the
consumer price index reflects the price of all final goods and services produced domestically. ANSWER:? F POINTS:?
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?2.? The consumer price index compares the price of a fixed basket of goods and services to the
price of the basket in the base year. On the other hand, the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base years. ANSWER:? T POINTS:?
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?3.? Indexation refers to the automatic correction of a dollar amount for the effects of inflation
by law or contract. ANSWER:? T POINTS:?
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?4.? Long term contracts between firms and unions will sometimes include partial or complete
indexation of the wage to the consumer price index. This is called a cost-of-living allowance clause. ANSWER:? T POINTS:?
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?5.? The core inflation rate is the consumer price index with the exclusion of the most volatile
components such as energy and food. ANSWER:? T POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.? In the CPI, goods and services are weighted according to
a. how much a typical consumer buys of each item.
b. whether the items are necessities or luxuries.
c. how much of each item is produced in the domestic economy.
d. how much is spent on them in the national income accounts. ANSWER:? A POINTS:?
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?2.? By not taking into account the possibility of consumer substitution, the CPI
a. understates the standard of living.
b. overstates the cost of living.
c. neither overstates nor understates the cost of living.
d. doesn't accurately reflect the cost of living, but it is unclear if it overstates
or understates the cost of living. ANSWER:? B POINTS:?
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?3.If the prices of Brazilian-made shoes imported into Canada increases, then
?a.both Canada’s GDP deflator and it’s consumer price index will increase.
b.neither Canada’s GDP deflator nor it’s consumer price index will increase.
c.Canada’s GDP deflator will increase but its CPI will not increase.
d.Canada’s consumer price index will increase, but its GDP deflator won’t chang
e. ANSWER:?D
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?4. ?If increases in the prices of Canadian car insurance causes the CPI to increase by 3 percent, the GDP deflator will likely increase by
a.more than 3 percent.
b. 3 percent.
c.less than 3 percent.
d.All of the above are correct.
ANSWER:?C
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?5. ?The real interest rate tells you
a.how quickly your savings account will grow.
b.how quickly the purchasing power of your savings account will grow.
c.the size of your savings account.
d.the purchasing power of your savings account.
ANSWER:?B
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?6. ?Inflation refers to
a. a temporary increase in the price level due to higher tax rates
b. a large increase in food and gasoline prices
c. a situation in which the economy's overall price level is rising
d.an increase in the purchasing power of the dollar
ANSWER:?C
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?7. ?If nominal interest rates increase from 8 percent to 10 percent while inflation increases from 3 percent to 12 percent
a.the real interest rate falls from 5 percent to –2 percent
b.the real interest rate rises from –2 percent to 5 percent
c.the real interest rate falls from 8 percent to 12 percent
d.the real interest rate rises from 8 percent to 12 percent
ANSWER:?A
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?8. ?If the nominal rate of interest is 10 percent and the rate of inflation is 3 percent, what is the real rate of interest?
a.13 percent
b.7 percent
c. 3 percent
d.–7 percent
ANSWER:?B
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?9.
?
The consumer price index:
a.measures price changes of raw materials
b.adjusts all prices of goods and services for five-year periods
c.measures the cost of goods and services bought by a typical consumer
d.cannot measure price changes of intangible production such as services ANSWER:?C
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?10 .?If the consumer price index (CPI) at the end of 1996 was 125 and the CPI at the end of 1997 was 131, then the rate of inflation during 1997 was
a.zero – prices were stable during 1997
b. percent
c. percent
d.125 percent
ANSWER:?B
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?11 .?Frank's nominal income in 1998 is $45,000. Suppose the CPI in 1998 is 150. What is Frank's real income?
a.$51,750
b.$45,000
c.$38,250
d.$30,000
ANSWER:?D
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?12 .?A change in the price of imports bought by consumers will be
a.reflected in the GDP deflator
b.reflected in GDP
c.reflected in the CPI
d.reflected in net national income
ANSWER:?C
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?13 .?All of the following but one are problems associated with the CPI
a.substitution bias
b.the introduction of new goods and services
c.unmeasured quality changes
d.The CPI is not based on a fixed basket of goods and services ANSWER:?D
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?14 .?Which of the following is correct?
a.The CPI is not based on a fixed basket of goods and services.
b.The GDP deflator reflects the prices of all domestically produced goods and services.
c.The GDP deflator is based on a fixed basket of goods and services.
d.The GDP deflator is subject to substitution bias.
ANSWER:?B
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?15 .?The inflation rate
a.is a measure of the cost of a basket of goods and services bought by firms
b.is the absolute change in prices between years
c.is the percentage change in the price index from the preceding period
d.measures changes in incomes from one year to the next
ANSWER:?C
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Short Answer
?1. ?What is the consumer price index (CPI)? What are the three major items included in the CPI? RESPONSE:?
ANSWER:?The CPI is a measure of the overall cost of the goods and services bought by
a typical consumer. The three major items included in the CPI are shelter,
transportation and food.
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?2. ?How is the CPI computed?
RESPONSE:?
ANSWER:?First the basket of goods and services must be determined and also the relative importance of the various items to be included in the basket. Then the prices
of the various items in the basket are determined. The cost of the basket is
then determined using the data on prices and quantity. The base year is chosen,
and the index for the base year is computed using the quantities in the basket
and the base year prices. The index is calculated by taking the price of the
basket in the each year and dividing this by the price of the basket in the base
year. This ratio is then multiplied by 100.
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?3. ?Differentiate between the nominal rate of interest and the real rate of interest. RESPONSE:?
ANSWER:?The nominal interest rate is the interest rate as usually reported without a correction for the effects of inflation. The real interest rate is the interest
rate corrected for the effects of inflation. The real interest rate = nominal
interest rate minus the inflation rate.
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?4. ?What is meant by the inflation rate?? If the CPI in 1996 was and in 1995 was , calculate the inflation rate for 1996.
RESPONSE:?
ANSWER:?The inflation rate is the percentage change in the price index from the preceding period.? The inflation rate for 1996 would be:
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?5. ?What are the problems associated with using the consumer price index to measure the cost of living?
RESPONSE:?
ANSWER:?The problems are: (1) Prices do not change proportionately. Consumers respond by buying less of the goods whose prices have risen by large amounts and by buying
more of the goods whose price have risen by less, or even fallen. The index is
computed using a fixed basket of items, so theses changes in quantity would not
be reflected in the basket. This is referred to as the substitution bias. (2)
The CPI is developed using a fixed basket of goods and services, when new products
CHAPT ER 25: PRODU CTION AND GROWT H are introduced during the time period that a particular fixed basket is being used, these new products will not be included in calculation of the index. (3) The CPI does not measure quality changes. If the quality of a good deteriorates from one year to the next, the value of the dollar falls, even if the price of the good stays the same. Likewise, if the quality of the good increases from one year to the next, the value of a dollar also rises. Statistics Canada will try to adjust the price of the good to account for the quality change, but it is very difficult to measure quality.
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True/False
Indicate whether the statement is true or false.
?1.? One way to raise future productivity is to invest less current resources in the production of capital. ANSWER:? F POINTS:?
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?2.? Diminishing returns occur when the benefits from an extra unit of output declines as the quantity of output declines. ANSWER:? F POINTS:?
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?3.? Malthusian theory states that an ever-increasing population would continually strain society’s ability to provide for itself. This doomed human beings to forever live in poverty. ANSWER:? T POINTS:?
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?4.? Productivity growth is measured by real output per worker. ANSWER:? T POINTS:?
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?5.? The primary reason that living standards are higher today than they were a century ago is that technological knowledge has advanced. ANSWER:? T POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.? Of the following countries, which grew the slowest over the last 100 years? a. Brazil. b. Mexico. c. Singapore. d. United States. ANSWER:? D POINTS:?
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?2.? On average, each year of schooling raises a person's wage in Canada by about a. 3 percent. b. 10 percent. c. 15 percent. d. 25 percent. ANSWER:? B POINTS:?
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?3.The primary reason that Canadian living standards are higher today than they were a century
? a go is that
a. more productive natural resources have been discovered.
b. physical capital per worker has increased.
c. technological knowledge has increase
d. d. human capital has increased. ANSWER:? C POINTS:?
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?4.? Many countries in Africa have low growth rates. This is partly due to a. few natural resources b. high trade barriers.
c. low incomes, making it very difficult for them to grow.
d. All of the above are correct. ANSWER:? B POINTS:?
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?5.? A government can encourage growth and, in the long run, raise the economy’s standard of living by encouraging a. population growth. b. consumption spending. c. saving and investment. d. trade restrictions. ANSWER:? C POINTS:?
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?6.? Diminishing returns is the notion that
a. as the stock of capital ages, the extra output produced decreases
b. as the stock of capital is increased, the extra output produced from an additional
unit of capital falls
c. as resources are used to produce capital goods, fewer additional capital goods can
be produced
d. you always get what you pay for ANSWER:? B POINTS:?
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?7.? Compared with richer countries, poorer countries are generally characterized by a. high real GDP per person b. political stability c. rapid population growth d. strongly enforced property rights ANSWER:? C POINTS:?
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?8.? Which one of the following countries would most likely be considered a poorer nation, using real GDP/person? a. Canada b. Germany c. Japan d. India ANSWER:? D
POINTS:?
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?9.? Which of the following factors would be most likely to encourage capital formation in a poorer nation?
a. the expectation of sustained high rates of inflation in the future
b. the expectation that property rights will remain secure
c. the expectation that a struggle between capitalist and socialist forces will lead
to major structural change in the economy
d. an increase in corporate taxes in order to finance an expanded government welfare
program ANSWER:? B POINTS:?
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?10.? Which of the following is most likely to cause the productivity of labour to increase? a. higher money wage rates
b. a higher rate of investment in human and physical capital
c. more flexible working hours and improved retirement plans
d. none of the above ANSWER:? B POINTS:?
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?11.? Suppose that factory output rose from 50,000 units to 55,000 units while labour hours rose from 1100 to 1200. Which of the following is true? a. Labour productivity remained unchanged. b. Labour productivity increased slightly. c. Labour productivity decreased slightly. d. Labour productivity increased sharply. ANSWER:? B POINTS:?
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?12.? Which of the following would be most likely to cause the real income per person of poorer countries to rise?
a. a more rapid population growth
b. a rapid rate of inflation
c. an international minimum-wage law
d. an increase in foreign investment that enhanced the productivity of the labour force ANSWER:? D POINTS:?
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?13.? If a production function has constant returns to scale, then: a. doubling inputs will double output. b. doubling inputs will triple output.
c. doubling inputs will cause output to increase, but the increase in output will be
less than the increase in inputs. d. doubling inputs will decrease output. ANSWER:? A POINTS:?
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?14.? The most important source of rising living standards over time is: a. the increase in the size of the labour force. b. the increase in the labour force participation rate.
CHAPT ER 26: SAVIN G, INVES TMENT, AND
THE FINAN CIAL SYSTE M
c. the increase in productivity.
d. the increase in human capital —the skills embodied in the work forc
e. ANSWER:? C POINTS:?
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Short Answer
?1.? What is productivity and why is it important? RESPONSE:? ANSWER:?
Productivity is the amount of goods and services produced from each hour of a worker’s time. It is the major determinant of the standard of living of a country.
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?2.? How is productivity determined? RESPONSE:? ANSWER:? Productivity is determined by a country’s physical capital, human capital, natural resources and technological knowledge.
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?3.? What is the World Bank and what are its functions? RESPONSE:? ANSWER:?
The World Bank is an international organization that among other things encourages the flow of capital to poor countries. It obtains funds from the world’s advance counties and loans them to less developed countries so that they can invest in capital infrastructure.? The World Bank offers advice to developing countries on how the funds might best be used.
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?4.? What are property rights? What role does property rights play in economic growth? RESPONSE:? ANSWER:?
Property rights refer to the ability of people to exercise authority over the resources they own. There must be an economy-wide respect for property rights for the price system or the free market to work. Lack of respect for property rights or the enforcement of property rights would not only cause political instability but would also discourage savings and investment. These are necessary for economic growth.
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?5.? Differentiate between inward-oriented policies and outward-oriented policies. RESPONSE:? ANSWER:?
Inward-oriented policies are aimed at raising productivity and living standards within a county by avoiding interaction with the rest of the world. This approach involves the protection of domestic industries to allow them to develop and grow without competition from foreign firms. Outward-oriented policies are designed to integrate countries into the world economy as international trade is considered to be a factor in generating economic growth.
POINTS:?
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True/False
Indicate whether the statement is true or false.
?1.?
P rivate savings are the tax revenue that the government has left after paying for its spending; and public savings is the income that households have left after paying for taxes and consumption. ANSWER:? F POINTS:?
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a.investment.
b.income minus the sum of consumption and government expenditures.
c.private saving plus public saving.
d.All of the above are correct.
ANSWER:?D
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?3.?I f the current market interest rate for loanable funds is below the equilibrium level, then there is a
a.shortage of loanable funds and the interest rate will rise.
b.surplus of loanable funds and the interest rate will rise.
c.shortage of loanable funds and the interest rate will fall.
d.surplus of loanable funds and the interest rate will fall.
ANSWER:?A
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?4.?S uppose that Parliament were to introduce a new investment tax credit. What would happen in the market for loanable funds?
a.The demand for loanable funds would shift left and interest rates fall.
b.The demand for loanable funds would shift right and interest rates rise.
c.The supply of loanable funds would shift left and interest rates rise.
d.The supply of loanable funds would shift right and interest rates fall.
ANSWER:?B
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?5.?I f Canada increases its budget deficit, it will reduce
a.private saving and so shift the supply of loanable funds left.
b.investment and so shift the demand for loanable funds left.
c.public saving and so shift the supply of loanable funds left.
d.None of the above are correct.
ANSWER:?C
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?6.?C rowding out refers to
a.the increase in national saving that occurs when government runs a deficit
b.the decrease in the real interest rates due to government borrowing
c. a reduction in investment spending resulting from government borrowing
d. a decrease in consumption spending resulting from government borrowing
ANSWER:?C
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?7.?F or a bank to be profitable, the loans it makes must _____ than the _____ obtaining funds.
a.cost more; price of
b.pay less interest; total revenue from
c.make more interest; total cost of
d.be less profitable; total revenue from
ANSWER:?C
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?8.?L arge budget deficits will likely
a.increase the nation's pool of saving
b.decrease the nation's pool of saving
c.have no impact on the nation's pool of saving
d.improve the nation's trade balance
ANSWER:?B
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?9.?T he supply curve of loanable funds is
a.upward-sloping, reflecting the fact that savers need a higher rate of interest to
coax them into lending more
b.downward-sloping, reflecting the fact that savers will increase their supply for
loanable funds at lower rates of interest
c.upward-sloping, reflecting the fact that savers will increase their saving at lower
rates of interest
d.None of the above
ANSWER:?A
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?10.?L oanable funds are
a.the money in banks and other financial institutions
b.the amount of credit available
c.equal to the total value of capital in the economy
d.available only to businesses
ANSWER:?B
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?11.?I f the market for loanable funds is not in equilibrium, which of the following factors must change to bring it to equilibrium?
a.output
b.profits
c.the inflation rate
d.the interest rate
ANSWER:?D
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?12.?I n the market for loanable funds
a.higher interest rates discourage savings
b.lower interest rates encourage investment
c.lower interest rates make borrowers worse off
d.higher interest rates increase the demand for loanable funds
ANSWER:?B
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?13.?B anks
https://www.doczj.com/doc/df19086000.html,e people's deposits to make loans
b.do not issue mortgage loans
c.print and circulate money.
d.have no positive impact on the economic system
ANSWER:?A
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?14.?G DP last year in a closed economy was $2000, taxes were $100, government spending was $200, and consumption was $1200. What was national saving?
a.$1000
b.$800
c.$700
d.$600
ANSWER:?D
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?15.?W hich of the following is correct?
a.Bondholders bear higher risk than stockholders.
b.Bondholders are issued owner shares of a corporation when they buy its bonds.
c.Stockholders enjoy the benefits of a company's profits.
d.If a company runs into financial difficulty, stockholders are paid what they are
due before bondholders receive anything.
ANSWER:?C
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Short Answer
?1.?W hat are financial markets?
RESPONSE:?
ANSWER:?Financial markets are financial institutions through which savers can directly provide funds to borrowers. The two most important financial markets in our
economy are the bond and the stock markets.
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?2.?W hat are three characteristics of a bond?
RESPONSE:?
ANSWER:? A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. It identifies the time at which the loan
will be repaid. This is the date of maturity or the term of the bond. The bond
also identifies the rate of interest that will be paid periodically until the
loan matures. The amount borrowed is called the principal. The credit risk,
that is, the probability that the borrower will default or fail to pay some
of the interest or principally is another characteristic of a bond. The third
important characteristic of the bond is the way in which the tax laws treat
the interest earned on the bond. The interest on most bonds is taxable income.
When provincial and local governments issue bonds called municipal bonds, the
bond owners are not required to pay federal income tax on the interest income.
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?3.?W hat are financial intermediaries? What are the most well-known financial intermediaries?
RESPONSE:?
ANSWER:?Financial intermediaries are financial institutions through which savers can indirectly provide funds to borrowers. Banks are the most well-known financial
intermediaries.
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?4.?E xplain the effect of a government budget deficit on the market for loanable funds.
RESPONSE:?
ANSWER:?When the government spends more than it receives in tax revenue, the resulting budget deficit lowers national savings. The supply of loanable funds decreases
CHAPT ER 28: UNEMP LOYME NT AND
ITS NATURAL RATE
and the equilibrium interest rate rises. Thus, when government borrows to finance its budget deficit, it crowds out households and firms who otherwise would borrow to finance investment.
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True/False
Indicate whether the statement is true or false.
?1.? The labour force is the number of employed plus the number of unemployed.
ANSWER:? T POINTS:?
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?2.? Discouraged searchers are individuals who continually search for work even though they cannot
find employment. ANSWER:? F POINTS:?
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?3.? The natural rate of unemployment is the rate of unemployment that is natural to any economy
and can never change. ANSWER:? F POINTS:?
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?4.? Employment insurance is a government program intended to ease the burden of those who are
permanently unemployed. ANSWER:? F POINTS:?
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?5.? Collective bargaining is a process by which unions and firms agree on the terms of employment.
ANSWER:? T POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.? Janine is on a temporary layoff from the factory where she makes BBQs. If Janine participates
in the Statistics Canada survey, she will be classified as a. unemployed and in the labour force. b. unemployed and out of the labour force. c. employed and in the labour force. d. employed and out of the labour force. ANSWER:? A POINTS:?
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?2.? Unemployment insurance
a. raises unemployment and reduces search effort
b. lowers unemployment and reduces search efforts
c. increases search effort and raises unemployment
d. increases search effort and decreases unemployment ANSWER:? A POINTS:?
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?3.? Minimum-wage laws
a. are the major cause of natural unemployment.
b.probably reduce teenage employment.
c.mainly affect skilled workers.
d.All of the above are correct. ANSWER:?B
POINTS:?0 / 1
?4. ?When a union bargains successfully with an employer, in that industry
a.unemployment and wages both rise.
b.unemployment and wages both fall.
c.unemployment rises and wages fall.
d.unemployment falls and wages ris
e.
ANSWER:?A
POINTS:?0 / 1
?5. ?Economists argue that efficiency wages
a.reduce labour-force participation rates.
b.reduce the natural rate of unemployment.
c.reduce the incentive to shirk.
d.increase worker turnover.
ANSWER:?C
POINTS:?0 / 1
?6. ?Which of the following are consequences of unemployment?
a. a rising price level, which reduces the purchasing power of consumers
b. a rising aggregate output and income
c.an increase in the money supply, which increases inflation
d. a decline in output and income
ANSWER:?D
POINTS:?0 / 1
?7. ?The natural unemployment rate:
a.is always at zero percent
b.is the amount of unemployment in the economy adjusted for the effects of inflation
c.is decided upon by the federal government
d.is the amount of unemployment that the economy normally experiences ANSWER:?D
POINTS:?0 / 1
?8. ?Discouraged searchers
a.are individuals who would like to work but have given uplooking for a job
b.are those persons dissatisfied with their present jobs
c.are included in the unemployment statistics
d.are unemployed but only for brief periods of time
ANSWER:?A
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?9. ?According to the theory of efficiency wages
a.the most profitable firms keep wages low
b.above-equilibrium wages are paid by the firm in order to increase worker productivity
c.some occupations are predominately male and others are predominately female
d.differences in human capital explain why firms pay high wages
ANSWER:?B POINTS:?0 / 1
?10 .?When a union successfully raises the wages of its members, it will also
a.increase total productivity, which must rise in proportion to the wage rate
b.reduce the quantity of labour demanded
c.raise the wages of nonunion workers
d.increase the share of income allocated to labour as opposed to capital ANSWER:?B
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?11 .?The natural rate of unemployment is
a.about 4 percent
b.unchanging
c.affected by minimum-wage laws
d.always increasing
ANSWER:?C
POINTS:?0 / 1
?12 .?Some frictional unemployment is inevitable because
a.of government labour market policies
b.unions push the wage above its equilibrium level
c.in a functioning economy there is always some expansion and contraction
d.All of the above
ANSWER:?C
POINTS:?0 / 1
?13 .?Which of the following statements may be said to be true of minimum wages?
a.They are a predominant reason for unemployment.
b.They have nothing to offer in terms of analysis of structural unemployment.
c.If minimum wage is kept above the equilibrium level, there will be unemployment.
d.Both a and c are correct.
ANSWER:?C
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?14 .?When people speak of the labour force participation rate, they are actually talking about
a.the percentage of people not working but actively seeking work
b.the percentage of working-age people who are either working or looking for work
c.the percentage of people who are actively participating in meaningful economic
activity
d.the percentage of the adult population that is in the labour force
ANSWER:?D
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?15 .?If an unemployed person quits looking for work, ceteris paribus
a.the unemployment rate decreases
b.the unemployment rate increases
c.the size of the labour force falls
d.Both a and c are correct
ANSWER:?D
POINTS:?0 / 1
Short Answer
?1. ?Distinguish between frictional and structural unemployment.
RESPONSE:?
ANSWER:?Fictional unemployment refers to unemployment due to the fact that it takes time for workers to search for the jobs that best suit their tastes and skills.
Structural unemployment refers to unemployment when the number of jobs available
in some labour markets is insufficient to provide a job for everyone who wants
one.
POINTS:?-- / 1
?2. ?There have been several studies of the incentive effects of employment insurance (EI) benefits. What do some of these studies show?
RESPONSE:?
ANSWER:?These studies show the following. (1) Job duration is affected by the length of time required to become eligible to collect EI benefits. Those who collect
EI tend to quit their jobs much sooner than they would otherwise have done if
not for the availability of EI.? (2) Employers initiate layoffs only after
workers become eligible for EI benefits. (3) The likelihood of finding new
employment increases as EI recipients near the end of their benefits. (4) Entry
into the labour force is significantly influenced by the availability and
generosity of EI benefits. These suggest that the design of the EI program
influences behaviour in ways that increase the unemployment rate. POINTS:?-- / 1
?3. ?Outline the argument made by critics of unions.
RESPONSE:?
ANSWER:?Critics of unions argue that unions are a type of cartel. When unions raise wages above the level that would prevail in competitive markets, they reduce the
quantity of labour demanded, and cause some workers to be unemployed. This
reduces wages in the rest of the economy, and is considered to be inefficient
and inequitable.
POINTS:?-- / 1
?4. ?Outline arguments made by proponents of unions.
RESPONSE:?
ANSWER:?Advocates of unions believe that a union is a necessary antidote to the market power of firms. This market power is most evidenced in the “company town” where
a single firm does most of the hiring. The union balances the firm’s market
power and protects the workers from being exploited by the firm’s owners. Unions
help firms respond efficiently to workers’ concerns. It would be too costly
for the firm to negotiate conditions of work for each individual worker. When
the union represents workers’ views on issues relating to working conditions,
the union allows the firm to provide the right mix of job attributes.? This helps
the firm to keep a happy and productive workforce.
POINTS:?-- / 1
?5. ?What are four reasons given why economies experience unemployment?
RESPONSE:?
ANSWER:?These are as follows: (1) Efficiency wages paid above the equilibrium wage rate
CHAPT ER 33: AGGRE GATE DEMAN D AND AGGRE GATE
SUPPLY
in order to increase worker productivity. (2) Minimum wage laws are legal minimum wages set above the equilibrium and which reduce the quantity of labour demanded, while increasing the quantity of labour supplied. (3) Frictional unemployment which results because it takes time for workers to search for the jobs that best sit their tastes and skills. (4) When unions bargain collectively for higher wages and better working conditions they raise wages above the equilibrium which results in unemployment.
POINTS:?
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True/False
Indicate whether the statement is true or false.
?1.? A recession is a period of two or more consecutive quarters of negative real gross domestic
product growth and rising unemployment. ANSWER:? T POINTS:?
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?2.? Gross domestic
product is the same as the sum of consumption, investment, government purchases and net exports. ANSWER:? T POINTS:?
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?3.? Aggregate supply is a curve that shows the quantity of goods and services that households,
firms, and the government want to buy at each price level ANSWER:? F POINTS:?
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?4.? The short run aggregate supply curve slopes upwards showing a negative relation between the
quantities supplied and the various price levels ANSWER:? F POINTS:?
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?5.? Most debates among economists about the causes of the great depression of the 1930s are
centered on a large decline in aggregate supply. ANSWER:? F POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.? In recent years, the decrease in real GDP during a recession is
a. mostly a decrease in investment spending.
b. mostly a decrease in consumption spending.
c. mostly a decrease in net exports.
d. None of the abov
e. ANSWER:? A POINTS:?
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?2.? Economists generally agree that classical economic theory applies
a. in neither the short nor long run.
b. in the short run and in the long run.
c. in the short run, but not in the long run.
d. in the long run, but not in the short run.