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MOUNT SAINT VINCENT UNIVERSITY HALIFAX, NOVA SCOTIA

Econ 1102: Take Home Test 4


Chapter 7
Student: ___________________________________________________________________________
1. A trough in the business cycle occurs when: A. cyclical unemployment is at a minimum point. B. employment and output reach their lowest levels. C. the natural rate of unemployment is at a minimum point. D. structural and frictional unemployment are at their highest levels.

2. In the expansion phase of a business cycle: A. the inflation rate decreases, but productive capacity increases. B. the inflation rate and productive capacity decrease. C. employment increases, but output decreases. D. employment and output increase.

3. A recession is a period in which: A. cost-push inflation is present. B. nominal domestic output falls. C. demand-pull inflation is present. D. real domestic output falls.

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4. The above diagram shows different phases of the : A. business cycle. B. cyclical variation. C. recession cycle. D. prosperity cycle.

5. Refer to the above diagram. The phases of the business cycle from points A to D are, respectively: A. peak, recession, expansion, trough. B. trough, expansion, expansion, peak. C. expansion, recession, trough, peak. D. peak, recession, trough, expansion.

6. Refer to the above diagram. The straight line E drawn through the wavy lines would provide an estimate of the: A. recession fluctuation. B. growth trend. C. natural rate of unemployment. D. expansion trend.

7. According to the economists, different kinds of shocks to the economy could be responsible for the variations in real output and employment over time. These shocks include: A. the changes in productivity, innovations and money supply. B. the changes in the level of total spending, productivity, innovations and money supply. C. the changes in the population. D. the changes in the standards of living.

8. Most economists believe that the immediate cause of cyclical changes in the levels of real output and employment is: A. the changes in productivity. B. the changes in technology. C. the changes in the level of total spending. D. the changes in the money supply.

9. In which of the following industries or sectors of the economy is employment likely to be most strongly affected by the business cycle? A. military goods B. durable goods (machinery, equipment, etc.) C. textile products (clothing) D. agricultural commodities (wheat, corn, etc.)

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10. The production of durable goods varies more than the production of nondurable goods because: A. durables purchases are non-postponable. B. durables purchases are postponable. C. nondurables purchases are postponable. D. durables purchases and nondurable purchases are both non- postponable.

11. In which industry or sector of the economy is output least likely to be affected by the business cycle? A. housing construction B. automobile production C. agricultural commodities D. capital goods production

12. The labour force includes: A. employed workers and persons who are officially unemployed. B. employed workers, but excludes persons who are officially unemployed. C. full-time workers, but excludes part-time workers. D. permanent employees, but excludes temporary employees.

13. Assuming the total population is 100 million, the civilian labour force is 50 million, and 47 million workers are employed, the unemployment rate: A. is 3 percent. B. is 6 percent. C. is 7 percent. D. is 9 percent.

14. Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, the official unemployment rate would: A. increase in the short run but eventually decline. B. increase. C. decline. D. be unchanged.

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The following information is about a hypothetical economy: Full-time employed = 80 Part-time employed = 25 Unemployed = 15 Discouraged workers = 5 Members of underground economy = 6 Consumer Price Index = 110

15. Refer to the above information. The unemployment rate is: A. 18.8 percent. B. 12.5 percent. C. 16.7 percent. D. 25 percent.

16. Refer to the above information. If 6 members of the labour force are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by: A. 0 percentage points. B. 2 percentage points. C. 7.5 percentage points. D. 6 percentage points.

17. In an economy, 35 million workers are employed out of a labour force of 50 million and a total population of 70 million. The unemployment rate is: A. 15 percent. B. 25 percent. C. 50 percent. D. 30 percent.

18. The unemployment rate in an economy is 12 percent. The civilian labour force is 50 million. The number of employed workers in the economy is: A. 38 million. B. 40 million. C. 42 million. D. 44 million.

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19. A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or under 15 years old. There are 188 million who are employed. What is the unemployment rate? A. 4 percent B. 6 percent C. 9 percent D. 27 percent

20. The unemployment rate in an economy is 7.5 percent. The total population of the economy is 250 million and the size of the civilian labour force is 180 million. The number of employed workers in this economy is: A. 13.5 million. B. 15.7 million. C. 166.5 million. D. 174.6 million.

21. Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. We can conclude that: A. the official unemployment rate will fall. B. the official unemployment rate will rise. C. the official unemployment rate will remain unchanged. D. the size of the labour force will increase.

22. Official unemployment statistics: A. understate unemployment because individuals receiving unemployment compensation are counted as employed. B. understate unemployment because "discouraged workers" are not counted as unemployed. C. include cyclical and structural unemployment, but not frictional unemployment. D. overstate unemployment because workers who are involuntarily working part time are counted as being employed.

23. Part-time workers are counted as: A. unemployed and therefore the official unemployment rate tends to overstate the level of unemployment. B. unemployed and therefore the official unemployment rate tends to understate the level of unemployment. C. fully employed and therefore the official unemployment rate tends to overstate the level of unemployment. D. fully employed and therefore the official unemployment rate tends to understate the level of unemployment.

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24. Assume Smith is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Smith will be considered as: A. cyclically unemployed. B. frictionally unemployed. C. secularly unemployed. D. employed.

25. A college or university graduate using the summer following graduation to search for a job would best be classified as: A. not officially a member of the labour force. B. a part of structural unemployment. C. a part of cyclical unemployment. D. a part of frictional unemployment.

26. "Waiting for employment" and "searching for employment" are both types of: A. cyclical unemployment. B. hidden unemployment. C. frictional unemployment. D. structural unemployment.

27. The best example of a "frictionally unemployed" worker is one who: A. reduces productivity by causing frictions in a business. B. is laid off during a recessionary period in the economy. C. is in the process of voluntarily switching jobs. D. is discouraged and not actively seeking work.

28. Working as an elevator operator used to be a common job in the workforce four decades ago, but today few jobs remain. The unemployment created by introduction of automatic elevators would be considered: A. wait. B. cyclical. C. frictional. D. structural.

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29. A headline reads: "Steel industry suffers slump as import competition increases and unemployment rises." This type of unemployment can best be characterized in economic terms as: A. frictional. B. structural. C. cyclical. D. natural.

30. Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is: A. cyclical. B. frictional. C. structural. D. natural.

31. When a group of workers find that their job skills and work experience have become obsolete and are not needed by industry, this type of unemployment is: A. search. B. frictional. C. structural. D. cyclical.

32. Unemployment that occurs when there is a decline in total spending is called: A. frictional unemployment. B. cyclical unemployment. C. structural unemployment. D. natural unemployment.

33. Cyclical unemployment is the result of: A. expansion in the economy B. technological change in the economy. C. seasonal variation in the labour force. D. a decline in total spending.

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The descriptions give the responses of four individuals to Statistics Canada. 1. Mollie just graduated from university and is now looking for work. She has had three job interviews in the past month. 2. George works in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in several months when national economic conditions improve. 3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the federal government cut defence spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills. 4. Ryan lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year, but was unsuccessful and quit looking for work.

34. Refer to the above information. Which individual is frictionally unemployed? A. 1 B. 2 C. 3 D. 4

35. Refer to the above information. Which individual is structurally unemployed? A. 1 B. 2 C. 3 D. 4

36. Refer to the above information. Which individual would be included in the calculation of the full-employment unemployment rate? A. 1 only B. 2 only C. 1 and 3 D. 2 and 4

37. If the unemployment rate is 9 percent and the natural rate of unemployment is 7.5 percent, then the: A. frictional unemployment rate is 7.5 percent. B. cyclical unemployment rate and the frictional unemployment rate together are 7.5 percent. C. cyclical unemployment rate is 1.5 percent. D. natural rate of unemployment will eventually increase.

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38. Which of the following constitute the unemployment occurring when the natural rate of unemployment exists? A. frictional and cyclical unemployment B. structural and frictional unemployment C. cyclical and structural unemployment D. frictional, structural, and cyclical unemployment.

39. Canada's economy is considered to be at "full employment" when: A. 90 percent of the total population is employed. B. 90 percent of the labour force is employed. C. about 6-7 percent of the labour force is unemployed. D. 100 percent of the labour force is employed.

40. When the Canadian economy has achieved "full employment," the unemployment rate is at or below: A. 7 percent. B. 4.0 percent. C. 3.3 percent. D. 2.5 percent.

41. The natural rate of unemployment is the: A. unemployment rate experienced at the depth of a depression. B. full-employment unemployment rate. C. unemployment rate experienced by the least-skilled workers in the economy. D. unemployment rate experienced by the most-skilled workers in the economy.

42. The GDP gap measures the: A. difference between NDI and GDP. B. amount by which potential GDP exceeds actual GDP. C. amount by which actual GDP exceeds NDI. D. amount by which nominal GDP exceeds real GDP.

43. If the unemployment rate is 12 percent, we can conclude that: A. the economy is in the expansion phase of the business cycle. B. potential GDP is in excess of actual GDP. C. actual GDP is in excess of potential GDP. D. actual GDP is equal to potential GDP.

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44. If the actual GDP is less than potential GDP: A. potential GDP will fall. B. the price level will rise. C. investment spending will fall. D. the actual unemployment rate will be higher than the natural unemployment rate.

45. "For every 1 percent that the actual unemployment rate exceeds the natural rate, there is generated a 2 percent GDP gap." This is a statement of: A. Stratford's law. B. Okun's law. C. the law of nominal incomes. D. the rule of 70.

46. If the natural rate of unemployment was 7 percent, the current unemployment rate was 12 percent, and the nominal GDP was $4,000 billion, then according to Okun's law the economy would have sacrificed: A. $10 billion in potential output. B. $400 billion in potential output. C. $40 billion in potential output. D. $440 billion in potential output.

The following information is for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent

47. The amount of output being forgone by the above economy is: A. $12 billion. B. $15 billion. C. $18 billion. D. $24 billion.

48. The consumer price index (CPI): A. is an average of the prices of all consumer goods purchased each year. B. measures changes in the prices of a market basket of some 600 goods and services purchased by urban consumers. C. measures prices of goods, but not services since services don't fit into a market basket. D. is also known as the GDP price index.

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49. If the consumer price index was 170 in one year and 180 in the next year, then the rate of inflation from one year to the next was approximately: A. 5.5 percent. B. 5.9 percent. C. 5.3 percent. D. 7.2 percent.

50. The consumer price index was 140.3 in 1992 and 144.5 in 1993. Therefore, the rate of inflation in 1993 was about: A. 6.7 percent. B. 3.0 percent. C. 1.2 percent. D. 13.6 percent.

51. If the price index rose from 254 in year 1 to 289 in year 2, then the rate of inflation for this economy in year 2 would be: A. 11.3 percent. B. 13.78 percent. C. 89 percent. D. 35 percent.

52. As applied to the price level, the "rule of 70" indicates that the number of years required for the price to double can be found by: A. dividing "70" into the annual rate of inflation. B. dividing the annual rate of inflation into "70." C. subtracting the annual change in nominal incomes from "70." D. multiplying the annual rate of inflation by "70."

53. Between 1967 and 1977 the price level approximately doubled. On the basis of this information we can say that the average annual rate of inflation over this ten-year period was about: A. 10 percent. B. 7 percent. C. 4 percent. D. 2 percent.

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54. Demand-pull inflation: A. occurs when prices of resources rise, pushing up costs and the price level. B. occurs when total spending exceeds the economy's ability to provide output at the existing price level. C. occurs only when the economy has reached its absolute production capacity. D. is also called cost-push inflation.

55. A statement that is often used to describe demand-pull inflation is: A. "a rising tide lifts all boats." B. "money is easily earned, but not easily saved." C. "too much spending chasing too few goods." D. "there is no such thing as a free lunch."

56. Inflation initiated by increases in wages or other resource prices is labelled: A. demand-pull inflation. B. demand-push inflation. C. cost-push inflation. D. cost-pull inflation.

57. The complexity in recognizing the type of inflation: A. arises because demand-pull inflation always follows the cost-push inflation. B. arises because sometimes the original source of inflation is unknown. C. arises because cost-push inflation always follows the demand-pull inflation. D. arises because demand-pull inflation is self-limiting while cost-push inflation will continue as long as there is excess spending.

58. Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will: A. fall by about 20 percent. B. fall by about 2 percent. C. rise by about 25 percent. D. rise by about 15 percent.

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59. If the average level of nominal income is $30,000 and the price level index is 154, the average real income would be about: A. $17,343. B. $18,521. C. $19,481. D. $20,955.

60. Which of the following is correct? A. Real and nominal incomes always move in the same direction. B. Inflation increases the purchasing power of the dollar and necessarily reduces one's nominal income. C. Inflation reduces the purchasing power of the dollar and necessarily reduces one's real income. D. Inflation reduces the purchasing power of the dollar, but does not necessarily reduce one's real income.

61. Unanticipated inflation: A. hurts people whose income is fixed. B. hurts borrowers and helps lenders. C. helps people whose income is fixed. D. helps savers.

62. A lender need not be penalized by inflation if the: A. long-term rate of inflation is less than the short-term rate of inflation. B. short-term rate of inflation is less than the long-term rate of inflation. C. lender correctly anticipates inflation and increases the nominal interest rate accordingly. D. inflation is unanticipated by both borrower and lender.

63. You are given the following information about the economy: (1) nominal interest = 8 percent; (2) real rate of interest = 6 percent. The inflation premium is: A. 2 percent. B. 6 percent. C. 8 percent. D. 14 percent.

64. When unanticipated inflation occurs: A. both creditors and debtors benefit. B. both creditors and debtors are hurt. C. debtors are hurt, but creditors benefit. D. creditors are hurt, but debtors benefit.

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65. In defending a mild inflation rate in the economy, the proponents argue that a mild inflation is a by-product of strong spending, and as a result: A. high spending generates high profit, strong demand for labour and, a great incentive for firms to expand their production capacity. B. high spending generates high profit, less need for labour and, a great incentive for firms to cut back production. C. high spending increases the general price level, increase in the cost of labour and this would result in cost push inflation. D. even a low inflation rate reduces the real output, employment and the profits of the firms.

66. In the 1920s, Germany experienced an economic condition which can be best described as: A. hyperinflation. B. cost-push inflation. C. unanticipated inflation. D. anticipated inflation.

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