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Testbank Chapter 6: Unemployment

Name

Description Question pool for Testbank Chapter 6: Unemployment

Instructions
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Multiple Choice

0 points

Question
The macroeconomic problem that affects individuals most directly and severely is:
Answer

inflation.
unemployment.
low savings.
low investment.
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Multiple Choice

0 points

Question
The unemployment rate in the United States since 1952 has:
Answer

never been close to zero.

gravitated toward a steady-state rate of zero.
remained constant from year to year.
equaled the natural rate of unemployment in every year.
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0 points

Question
The natural rate of unemployment in the United States since 1950 has averaged between
______ and ______ percent.
Answer

0; 1
1; 3
5; 6
10; 15
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The natural rate of unemployment is:

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Answer

the average rate of unemployment around which the economy fluctuates.

about 10 percent of the labor force.
a rate that never changes.
the transition of individuals between employment and unemployment.
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Multiple Choice

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Question
If the number of employed workers equals 200 million and the number of unemployed
workers equals 20 million, the unemployment rate equals ______ percent (rounded to the
nearest percent).
Answer

0
9
10
20
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Question
In a steady state:
Answer

no hiring or firings are occurring.

the number of people finding jobs equals the number of people losing jobs.
the number of people finding jobs exceeds the number of people losing jobs.
the number of people losing jobs exceeds the number of people finding jobs.
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Question
In the model of the steady-state unemployment rate with a fixed labor force, the rate of job
finding equals the percentage of the ______ who find a job each month, while the rate of job
separation equals the percentage of the ______ who lose their job each month.
Answer

labor force; labor force

labor force; unemployed
employed; labor force
unemployed; employed
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Question
If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then
the unemployment rate is approximately:
Answer

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f/(f + s).
(f + s)/f.
s/(s + f).
(s + f)/s.

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Question
If the fraction of employed workers who lose their jobs each month (the rate of job
separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the
rate of job findings), then the natural rate of unemployment is:
Answer

1 percent.
9 percent.
10 percent.
about 11 percent.
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Question
If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers
who lose their jobs each month (the rate of job separation) is 0.02, then the fraction of
unemployed workers who find jobs each month (the rate of job findings) must be:
Answer

0.02.
0.08.
0.10.
0.18.
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Question
If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed
workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of
employed workers who lose their jobs each month (the rate of job separations) must be:
Answer

0.08.
0.125.
0.22.
0.435.
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Question
Any policy aimed at lowering the natural rate of unemployment must either ______ the rate
of job separation or ______ the rate of job finding.
Answer

reduce; reduce
increase; increase
reduce; increase
increase; reduce
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Question
One reason for unemployment is that:
Answer

it takes time to match workers and jobs.

all jobs are identical.
the labor market is always in equilibrium.
a laid-off worker can immediately find a new job at the market wage.
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Question

All of the following are reasons for frictional unemployment except:

Answer

workers have different preferences and abilities.

unemployed workers accept the first job offer that they receive.
the flow of information is imperfect.
geographic mobility takes time.
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Question
Frictional unemployment is unemployment caused by:
Answer

wage rigidity.
minimum-wage legislation.
the time it takes workers to search for a job.
clashes between the motives of insiders and outsiders.
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Question
Unemployment caused by the time it takes workers to search for a job is called ______
unemployment.
Answer

frictional
structural
efficiency
insider
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Question
Which of the following is an example of frictional unemployment?
Answer

Dave searches for a new job after voluntarily moving to San Diego.
Elaine is willing to work for less than the minimum wage, but employers cannot
hire her.
Bill is qualified and would like to be an airline pilot, but airlines do not find it
profitable to hire him at the wage established by the airline pilot's union.
Joan is willing to work at the going wage, but there are no jobs available.

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Question
Sectoral shifts:
Answer

lead to wage rigidity.

explain the payment of efficiency wages.
depend on the level of the minimum wage.
make frictional employment inevitable.
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Question
Economists call the changes in the composition of demand among industries and regions:
Answer

insider-outsider conflicts.
sectoral shifts.
moral hazard.
adverse selection.
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Question
Frictional unemployment is inevitable because:
Answer

different sectors do not shift.

the economy needs to be lubricated.
workers never quit their jobs to change careers.
the demand for different goods always fluctuates.
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Question
A typical worker in the United States who is covered by unemployment insurance receives
______ percent of his or her former wages for ______ weeks.
Answer

50; 26
50; 52
67; 26
67; 52
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Question
Unemployment insurance increases the amount of frictional unemployment by:
Answer

making workers more frantic in their search for new jobs.

inducing workers to accept the first job offer that they receive.

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making employers more reluctant to lay off workers.

softening the economic hardship of unemployment.
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Question

All of the following policies were adopted by government in an attempt to reduce the natural
rate of unemployment except:
Answer

unemployment insurance.
government employment agencies.
public retraining programs.
the Illinois bonus program for unemployment insurance claimants who found
jobs quickly.
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Question
The unemployment insurance system may be desirable because unemployment insurance:
Answer

raises the natural rate of unemployment.

reduces the rate of job finding.
increases workers' uncertainty about their incomes.
induces workers to reject unattractive job offers.
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Question
Firms currently have incentives to temporarily lay off workers because firms typically are
charged for ______ of workers' unemployment benefits.
Answer

all
only a part
none
twice the cost
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Question
Most current unemployment-insurance programs are:
Answer

paid for fully by state governments.

paid for fully by the federal government.
100 percent experience rated.
partially experience rated.
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Question
Government policies directed at reducing frictional unemployment include:
Answer

abolishing minimum-wage laws.

making unemployment insurance 100 percent experience rated.
increasing the earned income credit.
making government part of the union-firm wage bargaining process.
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Question
Public policy to increase the job finding rate includes ______, and public policy to decrease
the job separation rate includes ______.
Answer

government employment agencies; higher unemployment insurance benefits

job training programs; 100 percent experience-rated unemployment insurance
higher minimum wage laws; payment of unemployment benefits for longer
periods
higher efficiency wages; partial experience-rated unemployment insurance
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Question
According to studies of individual unemployed workers, these workers are most likely to find
a job:
Answer

about three months before their unemployment insurance runs out.

within a few weeks of their unemployment insurance running out.
about three months after their unemployment insurance runs out.
at a time not influenced by the remaining number of weeks of unemployment
insurance.
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Question
The unemployment resulting when real wages are held above equilibrium is called ______
unemployment, while the unemployment that occurs as workers search for a job that best
suits their skills is called ______ unemployment.
Answer

efficiency; inefficiency
efficiency; structural
frictional; efficiency
structural; frictional
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Question
When there is structural unemployment, the real wage is:

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Answer

rigid at a level below the market-clearing level.

rigid at the market-clearing level.
rigid at a level above the market-clearing level.
flexible.
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Wage rigidity:
Answer

forces labor demand to equal labor supply.

is caused by sectoral shifts.
prevents labor demand and labor supply from reaching the equilibrium level.
increases the rate of job finding.
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Question
The unemployment resulting from wage rigidity and job rationing is called ______
unemployment.
Answer

frictional
structural
minimum-wage
insider
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Question
When the real wage is above the level that equilibrates supply and demand:
Answer

the quantity of labor supplied exceeds the quantity demanded.

the quantity of labor demanded exceeds the quantity supplied.
there is no unemployment.
the labor market clears.
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Question
Workers unemployed as a result of wage rigidity are:
Answer

actively searching for a job to match their skills.

not eligible to receive unemployment insurance benefits.
waiting for a job to become available.
relocating to another part of the country as a result of sectoral shifts.
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Question
Which of the following is the best example of structural unemployment?
Answer

Tim is looking for a job with flexible hours, but has not been offered one yet.
Vickie lost her job as a graphic artist at a movie studio because she did not have
training in computer-generated animation.
Kirby is seeking a job as an airline pilot, but the high union wages in the industry
have limited the number of jobs available.
Fatima lost her job at a packing plant, but has not looked very intensively for a
new job because she still has two months of unemployment insurance benefits
left.
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Question

All of the following are causes of structural unemployment except:

Answer

minimum-wage laws.
the monopoly power of unions.
unemployment insurance.
efficiency wages.
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Question
If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of
labor will ______ the number unemployed.
Answer

increase
decrease
not change
possibly increase, decrease, or leave unchanged
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Question
If wage rigidity holds the real wage above the equilibrium level, an increase in the demand
for labor will ______ the number unemployed.
Answer

increase
decrease
not change
possibly increase, decrease, or leave unchanged
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Question
The minimum wage:

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Answer

is usually about 75 percent of the average wage earned in manufacturing.

raises the wages of highly skilled workers.
encourages master workers to take on apprentices.
has its greatest impact on teenage unemployment.
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Question
Economists who have studied minimum-wage laws in the United States find that a 10
percent increase in the minimum wage increases teenage unemployment by about:
Answer

10 to 30 percent.
5 percent.
1 to 3 percent.
0 percent.
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Question
Permitting a lower minimum wage for teenagers would likely:
Answer

raise teenage unemployment.

raise teenage wages overall.
prevent teenagers from getting job experience.
raise unemployment among unskilled adults.
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Question
The earned income tax credit:
Answer

increases the government's tax revenue.

reduces the incomes of poor working families.
does not raise labor costs.
is not an alternative to raising the minimum wage.
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Question

All of the following statements about minimum-wage workers in the United States are correct
except:
Answer

Minimum-wage workers are more likely to be male.

Minimum-wage workers are more likely to work part time.
Minimum-wage workers are more likely to be less educated.
Minimum-wage workers are more likely to be young.
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Multiple Choice

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Question
The percentage of workers who belong to unions in the United States is approximately:
Answer

18 percent.
28 percent.
33 percent.
50 percent.
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Question
Unions contribute to structural unemployment when collective bargaining results in wages:
Answer

above the equilibrium level.

below the minimum wage.
below the equilibrium level.
above the level of unemployment compensation.
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Question
In the case of unions, the conflict of interest between different groups of workers results in
insiders wanting ______, while outsiders want ______.
Answer

more hirings; high wages

high wages; more hirings
high wages; fewer hirings
fewer hirings; high wages
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Question
When insiders have a much greater impact on the wage bargaining process than do
outsiders, the negotiated wage is likely to be ______ the equilibrium wage.
Answer

much greater than

much less than
almost equal to
about one-half of
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Question
When outsiders have a greater role than do insiders in the wage bargaining process, the
negotiated wage is likely to be ______ the equilibrium wage.
Answer

much greater than

much less than

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much closer to
about twice
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Question
Centralized union wage bargaining with government intervention in Sweden gives relatively
more influence to ______, while firm-level union wage bargaining in the United States gives
relatively more influence to ______.
Answer

efficiency wages; sectoral shifts

sectoral shifts; efficiency wages
insiders; outsiders
outsiders; insiders
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Question
One efficiency-wage theory implies that firms pay high wages because:
Answer

this practice increases the problem of moral hazard.

in wealthy countries, it is important to pay workers high wages to improve their
health.
the more a firm pays its workers, the greater their incentive to stay with the firm.
paying high wages promotes adverse selection.
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Question
Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing
wage for all of the following reasons except to:
Answer

reduce labor turnover.

improve the quality of the firm's labor force.
increase worker effort.
reduce the firm's wage bill.
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Question
According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages
because worker _____ increases.
Answer

productivity
turnover
unionization
shirking
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Question
Paying efficiency wages helps firms reduce the problem of adverse selection by:
Answer

generating additional profits that can be used to pay for more proficient hiring
managers.
keeping labor unions from organizing workers in the firm.
encouraging unsupervised workers to maintain a high level of productivity.
providing an incentive for the best-qualified workers to remain with the firm.
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Question
Paying efficiency wages helps firms reduce the problem of moral hazard by:
Answer

generating additional profits that can be used to improve working conditions.

keeping labor unions from organizing workers in the firm.
encouraging unsupervised workers to maintain a high level of productivity.
providing an incentive for the best-qualified workers to remain with the firm.
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Question
By paying efficiency wages, firms contribute to higher wait unemployment because they:
Answer

increase the wage bill.

make workers more productive.
keep the wage below the equilibrium level.
keep the wage above the equilibrium level.
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Question
When Henry Ford paid his workers $5 per day when the prevailing wage was between $2
and $3 a day:
Answer

it greatly increased his company's costs.

workers reduced their work efforts because they felt they had it made.
Ford proved the efficiency-wage theory was wrong.
it raised the efficiency of his workers.
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Question
Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the
short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term
unemployed). Approximately what percentage of the total spells of unemployment were
attributable to the long-term unemployed?

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Answer

9 percent
10 percent
43.5 percent
56.5 percent
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Question
Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the
short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term
unemployed). Approximately what percentage of the total weeks of unemployment were
attributable to the long-term unemployed?
Answer

9 percent
10 percent
43.5 percent
56.5 percent
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Question
Policies to substantially reduce unemployment should be targeted at:
Answer

the short-term unemployed.

the long-term unemployed.
discouraged workers.
insiders and outsiders.
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Question
Short-term unemployment is most likely to be ______ unemployment, while long-term
unemployment is most likely to be ______ unemployment.
Answer

structural; frictional
structural; the natural rate of
the natural rate of; frictional
frictional; structural
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Question
Most spells of unemployment are ______ term, and most weeks of unemployment are
attributable to ______ term unemployment.
Answer

short; short
short; long
long; long
long; short

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Question
During the period from 1990 to 2006 in the United States, most spells of unemployment
lasted:
Answer

less than one month, yet most of the weeks of unemployment occurred in spells
lasting two or more months.
more than one month, and most weeks of unemployment occurred in spells of
two or more months.
less than one month, and most weeks of unemployment occurred in spells of
one month or less.
more than one month, but most weeks of unemployment occurred in spells of
one month or less.
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Question
Data on unemployment in the United States show that:
Answer

most spells of unemployment are long.

most weeks of unemployment are attributable to the long-term unemployed.
members of the labor force over age 55 have the highest unemployment rates.
the average unemployment rate for the United States was lower in the 1980s
than in the 1970s.
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Question
In 2007 in the United States, among labor-force members between the ages of 16 and 19,
the highest unemployment rate was for:
Answer

black females.
black males.
white females.
white males.
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Question
Compared with an employed white teenage male, an employed middle-aged white male is
______ likely to become unemployed and, once unemployed, is ______ likely to find a job.
Answer

less; more
less; just as
more; less
just as; more
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Question
Differences in unemployment rates across demographic groups is most closely correlated
with differences in:
Answer

job finding rates.

job separation rates.
unionization rates.
efficiency wage rates.
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Question
During the past 50 plus years, the natural rate of unemployment in the United States ______
during the 1970s and 1980s, compared to the 1950s and 1960s, and then ______ during the
1990s and 2000s, compared to the previous two decades.
Answer

increased; increased
increased; decreased
decreased; decreased
decreased; increased
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Question

All of the following are possible explanations for the trends in the U.S. unemployment rate in
the last half of the twentieth century and early twenty-first century except:
Answer

the changing composition of the U.S. work force.

sectoral shifts.
a generally increasing real value of the minimum wage.
the links between unemployment and productivity.
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Question
The demographic explanation for the changes in the U.S. natural rate of unemployment over
the past 50 years rests on the idea that:
Answer

younger workers have higher rates of unemployment.

younger workers have lower rates of unemployment.
baby-boom workers were more productive than other workers because they had
greater access to technology.
baby-boom workers had higher than usual rates of job finding.
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Question
The sectoral shifts explanation for changes in the U.S. natural rate of unemployment over the
past 50 years rests on the idea that oil-price volatility ______ the rate of job ______.
Answer

increased; separation
decreased; separation
increased; findings
decreased; findings
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Question
Unemployment would decline in the face of rising productivity if:
Answer

real wages only increased sluggishly.

real wages adjusted instantaneously.
labor supply remained fixed in the face of increases in labor demand.
the demand for labor did not respond to the rising productivity.
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Question
Entry into and exit from the labor force are important to the determination of the
unemployment rate because:
Answer

more than one-half of the unemployed have only recently entered the labor
force.
most of the unemployed are young workers still looking for their first job.
discouraged workers are counted as part of the labor force.
almost one-half of all spells of unemployment end in the unemployed person's
withdrawal from the labor market.
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Question
Spells of unemployment end when the unemployed person finds a job or:
Answer

withdraws from the labor force.

enters the labor force.
runs out of unemployment insurance compensation.
refuses to answer unemployment survey questions.
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A spell of unemployment begins when a person leaves his or her job or:
Answer

withdraws from the labor force.

enters the labor force.
takes a vacation.

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has been without a job for at least four weeks.

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Transitions into and out of the labor force:
Answer

rarely occur.
do not affect unemployment statistics.
make unemployment statistics difficult to interpret.
reduce the amount of frictional unemployment.
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Question
Discouraged workers are counted as:
Answer

part of the labor force.

out of the labor force.
employed.
unemployed.
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Question
Discouraged workers are individuals who:
Answer

have jobs that do not match their skills (e.g., a PhD driving a taxi cab).
have been unemployed for more than 26 weeks.
call themselves unemployed but are not seriously looking for a job.
want a job but have given up looking for one.
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Question
Which of the following rankings (from most severe to least severe) best captures the degree
of hardship associated with various types of unemployment?
Answer

discouraged worker, short term, long term

involuntarily part-time, job leavers, job losers
job losers, job leavers, new entrants
job leavers, involuntary part-time, discouraged workers
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Many economists attribute part of the recent increase in European unemployment to:

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Answer

high birthrates.
slow rates of technological change.
generous benefits for unemployed workers.
increased demand for unskilled workers.
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Question
The recent reduced demand for unskilled workers relative to skilled workers has led to
______ for unskilled workers in Europe compared to ______ for unskilled workers in the
United States.
Answer

unemployment; lower wages

lower wages; unemployment
more unionization; efficiency wages
efficiency wages; more unionization
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Question
As the relative demand for unskilled workers falls, wages for unskilled workers ______ and
unemployment compensation becomes a ______ attractive option.
Answer

fall; more
fall; less
rise; more
rise; less
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Question
Results from the Euro-Barometer Survey series suggests that people are happier when
inflation is ______ and unemployment is ______.
Answer

high; high
high; low
low; high
low; low
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Question
European unemployment rates are positively correlated with each of the following except:
Answer

the percentage of the previous wage replaced by unemployment insurance.

the percentage of the labor force that is unionized.
the length of the period during which unemployment benefits can be collected.
the amount of coordination among employers in bargaining with unions.
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Question
Much of the difference in unemployment rates across Europe is attributable to differences in:
Answer

short-term unemployment.
long-term unemployment.
frictional unemployment.
the natural rate of unemployment.
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Question
Which of the following statements most closely describes the variation in unemployment
rates across countries in Europe?
Answer

Countries with higher rates of unionization tend to have higher unemployment

rates, but this is partially mitigated if wage negotiations are coordinated among
employers.
Countries with higher rates of unionization tend to have higher unemployment
rates, and this tendency is exacerbated if wage negotiations are coordinated
among employers.
Countries with more generous unemployment insurance benefits tend to have
higher unemployment rates, but this is partially mitigated if the benefits are
offered for a longer period of time.
Countries with more generous unemployment insurance tend to have lower
unemployment rates, but this effect is completely offset if benefits are offered for
a longer period of time.
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Multiple Choice

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Question
Which of the following statements correctly describes European labor markets?
Answer

In recent years, the unemployment rate in every European country has been
higher than the unemployment rate in the United States.
In recent years, the average unemployment rate in Europe has been higher than
the unemployment rate in the United States.
Within Europe the short-term unemployment rate shows greater variability
across countries than does the long-term unemployment rate.
European countries with more generous unemployment insurance tend to have
lower unemployment rates.
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Multiple Choice

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Question
In recent years, Europe has experienced ______ unemployment than the United States, and
employed Europeans work ______ hours than employed Americans.
Answer

more; more
more; fewer
less; fewer

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less; more
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Multiple Choice

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Question
Which of the following is not a proposed explanation for the fact that Americans on average
work 20 percent more hours than the typical resident of western Europe?
Answer

Europeans have more taste for leisure than Americans.

Americans have a lower unionization rate than Europeans.
Europeans face higher tax rates than Americans.
The underground economy is larger in America than in Europe.
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Multiple Choice

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Question
According to Blanchard, Europeans are more likely to use increases in real wages resulting
from technological progress to increase ______, and Americans are more likely to use these
increases in real wages to increase ______.
Answer

hours of work; hours of leisure

consumption of goods and services; hours of leisure
hours of leisure; consumption of goods and services
unemployment insurance benefits; efficiency wages
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Multiple Choice

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Question
If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current
unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium
rate, and in the next period it will move ______ the equilibrium rate.
Answer

above; toward
above; away from
below; toward
below; away from
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Multiple Choice

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Question
Assume that a country experiences a reduction in productivity that lowers the marginal
product of labor for any given level of labor. In this case, the:
Answer

labor supply curve shifts to the right.

labor supply curve shifts to the left.
labor demand curve shifts upward and to the right.
labor demand curve shifts downward and to the left.
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Multiple Choice

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Question
Assume that a country experiences a reduction in productivity that shifts the labor demand
curve downward and to the left. If the labor market were always in equilibrium, this would
lead to:
Answer

a lower real wage and a rise in unemployment.

a lower real wage and no change in unemployment.
a lower real wage and less unemployment.
no change in real wage or in unemployment.
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Multiple Choice

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Question
Assume that a country experiences a reduction in productivity that shifts the labor demand
curve downward and to the left. If the real wage were rigid, this would lead to:
Answer

no change in the real wage and a rise in unemployment.

no change in the real wage and no change in unemployment.
no change in the real wage and a fall in unemployment.
a decrease in the real wage.
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Essay

0 points

Question
If the rate of job separation is 0.02 per month and the rate of job finding is 0.10 per month,
what is the natural rate of unemployment?
Answer

16.67 percent
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Essay

0 points

Question
If the economy were at a steady-state unemployment rate with a separation rate of 0.02 per
month and a job-finding rate of 0.10 per month, and the labor force was 100 million, how
many individuals would lose their jobs each month?
Answer

1.67 million
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Essay

0 points

Question
Assume that an employer believes that the efficiency (e) it can get from a particular worker,
as a function of the hourly wage (w), is given by function e = 0.125w + 0.15w 0.005w , at
2

least up to a wage of 30.

a.
Create a table of w, e, e/w, and w/e for wages equal to 5, 10, 14, 15, 16, 20,
and 25.
b.

Which wage gives the highest ratio of efficiency per unit of labor cost?

c.

Once the firm has hit on an optimal w, whatever it is, would cutting wages
whenever demand falls off increase or decrease wages per unit of efficiency?

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Answer a.

e/w

w/e

2.50

0.500

2.000

10

8.75

0.875

1.143

14

13.93

0.995

1.005

15

15.00

1.000

1.000

16

15.92

0.995

1.005

20

17.50

0.875

1.143

25

12.50

0.500

2.000

b. 15
c. Cutting wages (any wage lower than 15) would increase wages per unit of
efficiency.
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Essay

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Question
Assume that a society consists of two types of workers. For type A, 3 million workers lose
their jobs each year, and each one takes a year to find a new one. For type B, 36 million
workers lose their jobs each year (3 million per month), and each takes one month to find a
new job. Thus, at any given time, 6 million are unemployed in this economy.
a.
How many spells of unemployment occur each year in this economy?
b.

What percentage of the spells are only one month long?

c.

If you take all the workers unemployed each year and multiply each by the
length of his or her unemployment spell, how many months of
unemployment would there be in this economy each year?

d.

Of all the months of unemployment, how many are accounted for by the
workers unemployed a year at a time?

Answer

a. 39 million
b. 92.3 percent
c. 72 million

d. 50 percent
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Essay

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Question
Changes in economic policies will frequently have an impact on the unemployment rate.
Explain whether each of the policy changes described is likely to: 1) affect frictional or
structural unemployment and 2) increase or decrease the measured unemployment rate.
a.
The government reduces the number of weeks of unemployment insurance that
unemployed workers can receive.
b.

The government raises the minimum wage.

c.

The government increases spending on job-training programs.

Answer a. Frictional unemployment is likely to be reduced as unemployed workers take

fewer weeks to search for new jobs because of reduced benefits. This process is
likely to reduce the measured unemployment rate.
b. Structural unemployment will probably increase for those workers with marginal
product valued below the higher minimum wage. This policy change is likely to
increase the measured unemployment rate.
c. Frictional unemployment will be reduced if workers with obsolete skills receive

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training that prepares them for available jobs. This policy change is intended to
reduce the measured rate of unemployment.
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Essay

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Question
The model of the steady-state rate of unemployment assumes that the size of the labor force
is fixed. If the size of the labor force is allowed to vary:
a.
explain how the job-loss and job-finding processes will differ from the situation
when the labor force is fixed.
b.

explain how interpretations of changes in the unemployment rate will become

less clear.

Answer a. With a varying labor force, job finders will include both the unemployed who find
jobs and new entrants into the labor market. Similarly job losers will include the
unemployed, as well as those who leave the labor force.
b. A decrease in the unemployment rate could result from some combination of 1)
fewer unemployed people because the previously unemployed found jobs, 2) fewer
unemployed people because previously unemployed left the labor force, or 3) an
increase in the size of the labor force while the number of unemployed remains
unchanged.
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Essay

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Question
The average unemployment rate in western Europe is higher than in the United States.
a.
Explain one difference between the European and U.S. economies that is
consistent with more structural unemployment in Europe.
b.

Explain one difference between the European and U.S. economies that is
consistent with more frictional unemployment in Europe.

Answer a. The degree of unionization is greater in Europe, so there is more unemployment

due to wage rigidity.
b. Unemployment benefits in Europe are more generous, so there is more frictional
unemployment than in the United States.
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Essay

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Question
Assume that the real wage in an economy is held above equilibrium.
a.
Graphically illustrate how an increase in technology that raises the demand for
labor will change the number of unemployed workers. Be sure to label the axes
and the quantities of labor hired before and after the technological progress.
b.

Explain in words what happens to the number of unemployed as a result of this

change.

Answer

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a.

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b. The number of unemployed falls from (L L ) to (L L ).

1

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Essay

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Question
Assume that the real wage in an economy is held above equilibrium.
a.
Graphically illustrate how an increase in the supply of labor will change the
number of unemployed workers. Be sure to label the axes and the quantities of
labor hired before and after the technological progress.
b.

Explain in words what happens to the number of unemployed as a result of this

change.

Answer a.

b. The number of unemployed increases from (L* L ) to (L** L ).

1

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Essay

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Question
Reducing the natural rate of unemployment requires reducing the rate of job separation and
increasing the rate of job finding. Explain at least one policy that will impact each of these
aspects of the natural rate of unemployment.
Answer Policies that could improve job finding include government employment agencies,
job training programs, and reducing the amount and duration of unemployment
benefits. A policy to reduce the rate of job separation could be to make
unemployment insurance 100 percent experience rated. This increases the cost of
temporarily laying off employees and could reduce the job separation rate.
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Essay

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Question
Consider two countries: Flexiland and Stuckland. The labor force in each country consists of
100,000 workers. In Flexiland, a different 500 workers are unemployed each month. In
Stuckland, the same 500 workers are unemployed for the entire year. Compare and contrast
the unemployment situation in the two countries by explaining:
a.
the unemployment rate,
b.

the number of spells of unemployment,

c.

the average duration of each unemployment spell, and

d.

whether the unemployment is more likely to be frictional or structural.

Answer a. The unemployment rate in both countries is 5 percent.

b. There are 12 times as many spells of unemployment in Flexiland than in
Stuckland.
c. The average duration of each unemployment spell is 12 times longer in
Stuckland.
d. Unemployment is more likely to be frictional in Flexiland and structural in
Stuckland.
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Essay

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Question
Explain what type of wage rigidity is most likely to affect the unemployment rates of the
following types of workers:
a.
workers with low marginal labor productivity;
b.

workers seeking jobs that are typically unionized, such as longshoremen and
electricians; and

c.

workers engaged in creative work that is not easily monitored.

Answer

a. minimum wage
b. union wage
c. efficiency wage
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Question
Explain how paying efficiency wages can help employers overcome both moral hazard and
adverse selection problems in employment.

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Answer Efficiency wages are wages above the market clearing level. Higherthan-equilibrium wages give the best workers more incentive to stay with the firm,
thereby reducing the adverse selection problem of an employer not being able to
clearly distinguish good workers from poor workers. Higher-than-equilibrium wages
give workers greater incentive to avoid shirking, a moral hazard problem when
workers are not easily monitored, by increasing the penalty (lost wages) of being
caught not working.
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Essay

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Question
Compare the impact in Europe versus the United States of technological changes that have
reduced the demand for low-skilled workers.
Answer The reduction in the demand for low-skilled workers in the United States reduced
wages relative to higher-skilled workers. The reduction in the demand for low-skilled
workers in Europe was an increase in unemployment as unemployment benefits
offered a better alternative than working for lower wages.
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