1. Which of the Following Is NOT in the Labor Force?

1. Which of the following is NOT in the labor force?

a. Discouraged workers b. Those who worked full time, but in a family business c. Those temporarily laid off who will be recalled soon d. The unemployed e. All of the above

For the question below, assume the following. The non-institutional civilian population is 400 million, of which 200 million are employed and 16 million are unemployed.

2. Based on the above, the labor force participation rate is

a. 4% b. 5% c. 7.4% d. 8% e. None of the above

3. Which of the following variables is most directly determined in the labor market?

a. Interest rates b. Nominal wages c. Stock prices d. All of the above e. None of the above

4. The reservation wage is

a. The wage offer that will end a labor strike b. The lowest wage firms are allowed to pay workers c. The wage that ensures a laid-off individual will wait for re-hire, rather than find another job. d. The wage that an employer must pay workers to reduce turnover to a reasonable level. e. None of the above.

5. The efficiency wage theory suggests that

a. Firms will be more resistant to wage increases as the labor market tightens. b. The government can only set rax rates so high before people prefer not to work. c. Unskilled workers will have a lower turnover rate than skilled workers. d. D. Workers will be paid less than their reservation wage. e. Productivity might drop if the wage rate is too low.

6. In the wage setting relation, the nominal wage increases when

a. The price level rises. b. Unemployment benefits fall. c. The minimum wage falls. d. The unemployment rate rises. e. All of the above.

7. For this question, assume there is perfect competition in the product market. Given this assumption, we know that m in the price setting equation P = (!+m)W will equal

a. P. b. 1. c. 0. d. W. e. W/P.

8. The natural rate of unemployment is the rate of unemployment

a. That occurs when the money market is in equilibrium. b. That occurs when both the goods and financial markets are in equilibrium. c. That occurs when the markup of prices over costs is zero. d. Where the markup of prices over costs is equal to its historical value. e. None of the above.

9. Suppose the actual unemployment rate decreases. This will cause

a. A downward shift in the WS curve. b. An upward shift in the PS curve c. A movement along the WS ad PS curves. d. An upward shift in the WS curve. e. None of the above.

10. Suppose the aggregate production function is given by the following: Y = N. Given this information, we know that labor productivity is represented by the following:

a. 1/N. b. N/Y. c. 1. d. N. 11. Assume that product markets become less competitive in the U.S. Given this information, we wold expect to observe which of the following?

a. An upward shift in the WS curve. b. A downward shift in the WS curve. c. An upward shift in the PS curve. d. A downward shift in the PS curve. e. None of the above.

12. Based on our understanding of the labor market model presented in Chapter 6, we know that a reduction in the markup will cause

a. An increase in the equilibrium real wage. b. A reduction in the equilibrium real wage. c. An increase in the natural eate of unemployment. d. A reduction in the natural rate of unemployment and no change in the real wage.

13. In the aggregate supply relation, the current price level depends upon:

a. Fiscal policy. b. Consumer confidence. c. Monetary policy. d. Expected price level. e. All of the above.

14. Suppose that the current price level is equal to the expected price level. Given this information, we know with certainty that

a. The goods market and financial markets are in equilibrium. b. The unemployment rate is equal to the natural rate of unemployment. c. The unemployment rate is zero. d. Both the price level and the expected price level are equal to one. e. None of he above.

15. Which of the following will cause the aggregate demand curve to shift to the left?

a. A rise in the price level. b. A decrease in the price level. c. An increase in taxes. d. An increase in consumer confidence. e. An increase in the money supply.

16. Suppose the central bank implements contractionary monetary policy. Which of the following will occur in he short run? a. A decrease in the price level. b. A decrease in output. c. An increase in the interest rate. d. All of the above. e. None of the above.

17. Assume the economy is initially operating at the natural level of output. Which of the following events will initially cause a shift of the aggregate supply curve?

a. An increase in the money supply. b. An increase in consumer confidence. c. An increase in government spending. d. All of he above. e. None of the above.

18. The neutrality of money is consistent with which of the following statements?

a. Changes in the money supply will not affect employment in the short run. b. Changes in the money supply will not affect the price level in the medium run. c. Changes in the money supply will not affect the price level in the short run. d. Changes in the money supply will not affect employment in the medium run.

19. Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the medium run, have no effect on which of the following?

a. The price level. b. The interest rate. c. Employment. d. All of the above. e. None of the above.

20. Assume the economy is initially operating at the natural level of output. Which of the following events will NOT change the composition of output (that is, the percentage of GDP composed of consumption, investment, etc.) in the medium run?

a. A reduction in the desire to save. b. An increase in the money supply. c. A cut in taxes. d. An increase in consumer confidence. e. A reduction in government spending. 21. Which of the following represents the short-run effects of an increase in the prive of oil?

a. An increase in the interest rate. b. A reduction in output. c. An increase in the price level. d. All of the above. e. None of the above.

22. Which of the following events will NOT cause an increase in the aggregate price level?

a. A reduction in output. b. An increase in unemployment benefits. c. An increase in expected price. d. An increase in the markup. e. None of the above.

23. At the current level of output, suppose that the actual price level is greater than the expected price level. We know that

a. Output is currently below the natural level of output. b. The interest rate will rise as the economy adjusts to this situation. c. The AS curve will tend to shift down over time. d. The nominal wage will tend to decrease as individuals revise their expectations of the price level. e. None of the above.

24. For this question, assume that the economy is initially operating at the natural level of output. A fiscal contraction must cause

a. An increase in investment in the short run. b. No change in investment in the medium run. c. A reduction in investment in the short run. d. An increase in investment in the medium run. e. None of the above.

25. In the Phillips curve equation, which of the following will NOT cause a reduction in the current inflation rate? a. A reduction in the expected inflation rate. b. An increase in the markup. c. An increase in the unemployment rate. d. All of the above. e. None of the above.

26. Which of the following statements will likely be correct when inflation has not been very persistent? a. The current inflation rate will not depend heavily on past years’ inflation. b. Lower unemployment rates will be associated with higher inflation rates. c. The expected price level for a given year will equal the previous year’s actual price level. d. All of the above. e. None of the above.

27. The original Phillips curve implied or assumed that a. The actual and expected rates of inflation would always be equal. b. The expected rate of inflation would be zero. c. The markup over labor costs was zero. d. All of the above. e. None of the above.

28. Which of the following will NOT cause a reduction in the natural rate of uemployment? a. A reduction in z. b. A reduction in the markup, μ.. c. An increase in α. d. A reduction in the expected inflation rate. e. None of the above.

29. Which of the following would be most likely to cause a change in the natural rate of unemployment? a. Changes in monetary policy. b. Changes in the rate of inflation. c. Changes in the price of oil. d. Changes in fiscal policy. e. Changes in the percentage of labor contracts that are indexed.

30. A reduction in the price of oil will likely cause which of the following? a. Decrease in the natural rate of unemployment. b. Decrease in the sum “μ + z” in the Phillips curve equation. c. Decrease in the markup in the Phillips curve equation. d. All of the above. e. None of the above. 31: For this question, assume that the Phillips curve equation is represented by the following: μt - μt-1 = (μ + z) – αu. Which of the following will cause an increase in the natural rate of unemployment? a. An increase in z. b. An increase in μ. c. An increase in α . d. A reduction in expected inflation. e. None of the above.

32. Assume that expected inflation is based on the following: πet = θπt-1. An increase in θ will cause a. Inflation in period t to be more responsive to changes in unemployment in period t. b. An increase in the natural rate of unemployment. c. No change in the natural rate of unemployment. d. A reduction in the natural rate of unemployment.

33. Suppose the Phillips curve is represented by the following equation: πt - πt-1 = 20 - 2ut Given this information, which of the following is most likely to occur if the actual unemployment in any period is equal to 6%? a. The rate of inflation will be constant. b. The rate of inflation will tend to decrease. c. The rate of inflation will tend to increase. d. None of the above.

34. For this question, assume that the natural rate of unemployment is 4%. Suppose the US inflation rate has been 8 % for many years and the policy makers want next year’s inflation rate to be 2%. According to the Phillips curve for the US, the unemployment rate next year will have to be a. 0%. b. 2% c. 7%. d. 8%. e. 10%.

35. Which of the following pairs of variables represent those variables explained by Okun’s law? a. The inflation rate and the unemployment rate. b. The money growth rate and the change in output growth rate. c. The growth rate of output and the change in the unemployment rate. d. The inflation rate and the change in the unemployment rate. e. The money growth rate and the inflation rate.

36. Which of the following will result in labor hoarding by a firm? a. The firm keeps the most productive workers for itself, and lays off the least productive. b. The firm keeps the most productive workers for itself, and allows the least productive to quit. c. The firm retains more workers than needed when demand is low. d. The firm has more employees than necessary at all times. e. The firm provides top management will too much support staff.

37. When output and employment decrease a. The unemployment rate increases. b. The labor force participation rate tends to decrease. c. Fewer discouraged workers begin looking for jobs. d. All of the above. e. None of the above.

38. Output growth will equal 0 when which of the following conditions is satisfied? a. 0% nominal money growth; 2% inflation. b. 2% nominal money growth; 2% inflation. c. 3% nominal money growth; 0% inflation. d. -2% nominal money growth; 1% inflation. e. None of the above.

39. In the medium run, a reduction in nominal money growth from 8% to 4% will cause the unemployment rate to a. Decrease by 5%. b. Increase by 3%. c. Remain unchanged. d. Decrease by 3%. e. Increase by 5%.

40. A permanent increase in nominal money growth will, in the medium run, cause which of the following? a. An increase in the actual growth rate of output. b. An increase in the normal growth rate of output. c. An increase in the inflation rate. d. All of the above. e. None of the above.

41: For this question, assume that the Phillips curve equation is represented by the following: πt - πt-1 = -.33(ut - un). Given this information, the sacrifice rate to this economy will be approximately equal to a. .67. b. -.33. c. .33. d. -3. e. 3.

42. One implication of the Lucas critique is that a. It takes a long time for a reduction in money growth to reduce the inflation rate. b. Unemployment will always be above its natural rate in the short run. c. Unemployment is always at its natural rate in the short run. d. The sacrifice ratio should be relatively high. e. None of the above.

43. In Taylor’s model of ‘staggered wages contracts’ a. People always expect an inflation rate of zero. b. The sacrifice ratio becomes infinite. c. It is not possible to reduce inflation without a recession. d. Changes in money growth have no impact on unemployment. e. The government is assumed to have no targets for inflation and unemployment.

44. Suppose there is an announced reduction in money growth. The Lucas critiwue suggests that this announced reduction will a. Have no effect on the unemployment rate. b. Have no effect on gyt. c. Have a sacrifice ratio of 0. d. All of the above. e. None of the above. 45. Suppose the central bank wants to reduce inflation by 10%, un = 6%, and α = 3. How many point.years of excess unemployment will be needed to reduce inflation by 6%? a. 2. b. 7.5. c. 15. d. 30.

46. A deflation refers to a situation where a. Both inflation and the unemployment rate are increasing. b. The inflation rate is negative. c. The inflation rate is falling. d. Both inflation and the unemployment rate are falling. e. None of the above.

47. Suppose money growth in period t is 6% and that inflation in period t is 1%. Given only that information, we know with certainty that a. Output growth is 5% in period t. b. ut > un. c. ut < un. d. The inflation rate will decrease in the next period. e. The inflation rate will increase in the next period.

Answers

1 a 2 c 3 b 4 e 5 e 6 a 7 c 8 e 9 e 10 c 11 d 12 a 13 d 14 b 15 c 16 d 17 e 18 c 19 c 20 b 21 d 22 A 23 A 24 E 25 B 26 D 27 B 28 D 29 C 30 D 31 E 32 C 33 C 34 E 35 C 36 C 37 D 38 B 39 C 40 C 41 E 42 E 43 C 44 D 45 A 46 B