Macroeconomics - Chapter 7

Front 1

1. The labor force participation rate is defined as
a) the ratio of employment to the labor force
b) the ratio of the working-age population to the total population
c) the ratio of employment to the total population
d) the ratio of the labor force to the civilian, non-institutionalized, working-age population
e) the number of hours worked per week divided by 40

Back 1

d) the ratio of the labor force to the civilian, non-institutionalized, working-age population

Front 2

2. Suppose that 30% of a country’s population is institutionalized in schools, hospitals,
or prisons; 10% are full-time homemakers; another 10% are retired; 45% of the
population is employed either full-time or part-time; and 5% of the population is
unemployed and seeking work. Then the unemployment rate is
a) 5%
b) 10%
c) 15%
d) 25%
e) 55%

Back 2

b) 10%

Front 3

3. The most accurate measurement of unemployment
a) is an extrapolation based on a random survey of households
b) counts the number of workers collecting unemployment insurance benefits
c) uses payroll data by subtracting the number of workers employed at firms from the
number of citizens of working age
d) uses the number of layoffs reported to the government by employers
e) none of the above

Back 3

a) is an extrapolation based on a random survey of households

Front 4

4. The marginal product of labour is defined as
a) the amount of output produced by a given labour force
b) the minimum amount of workers required to produce a given level of output
c) the increase in productivity of the marginal worker if capital is increased
d) the amount of output one more worker could produce given other factors of
production are fixed
e) the cost of employing another worker

Back 4

d) the amount of output one more worker could produce given other factors of
production are fixed

Front 5

5. If the stock of physical capital remains constant while employment rises, output
a) initially declines, then eventually rises
b) increases at an increasing rate
c) remains constant in real terms
d) increases at a decreasing rate
e) fluctuates with the price level

Back 5

d) increases at a decreasing rate

Front 6

6. Suppose that production at a firm occurs according to the following schedule.

Labor: 0 1 2 3 4 5 6
Output: 0 175 340 495 640 765 880
If the wage per unit of labor is $765 and the price of output is $5 per unit, then the
optimal amount of labor to hire is
a) zero
b) at least one but less than two
c) between three and four
d) five
e) six or more

Back 6

c) between three and four

Front 7

7. If a firm’s marginal product of labor is currently 75 units of output, the wage is $15
per unit of labor, and output sells for $0.80 per unit, the firm should
a) shut down production
b) hire fewer workers
c) maintain its current workforce, but at fewer hours per worker
d) keep the current number of employees and hours worked
e) hire more labor

Back 7

e) hire more labor

Front 8

8. Suppose that production at a firm occurs according to the following schedule.

Labor: 0 1 2 3 4 5 6
Output: 0 85 160 225 280 325 360

If output sells for $6 per unit, then for 5 units of labor the firm should be willing to pay a
wage rate (per unit of labor) of up to
a) $30
b) $45
c) $180
d) $270
e) $1950

Back 8

d) $270

Front 9

9. The labor supply curve
a) slopes upward if the income and substitution effects of a wage increase exactly offset
each other
b) is vertical if the income effect of a wage increase is dominant
c) is downward-sloping if the income effect of a wage increase is dominant
d) is vertical if the substitution effect of a wage increase is dominant
e) is horizontal in the long run

Back 9

c) is downward-sloping if the income effect of a wage increase is dominant

Front 10

10. Increases in labor productivity from improved technology
a) increase the long run supply of labor
b) reduce the demand for labor
c) reduce real wages
d) induce firms to substitute capital for labor
e) have no long run effect on total hours worked

Back 10

e) have no long run effect on total hours worked

Front 11

11. The natural rate of unemployment is a measure of
a) human capital
b) long run equilibrium in the labor market
c) the rate at which natural resources are extracted and depleted
d) the size of the private sector relative to the public sector
e) the rate at which marginal returns to labor are diminishing according to the
economy’s long run production function

Back 11

b) long run equilibrium in the labor market

Front 12

12. Among developed economies, the natural rate of unemployment
a) is a fixed number
b) tends to follow a steady upward trend
c) varies, but less the actual unemployment
d) varies more the actual unemployment
e) tends to follow a steady downward trend

Back 12

c) varies, but less the actual unemployment

Front 13

13. The rate of unemployment will be higher (for a given level of labour market coordination)
a) if firms have less monopoly power
b) if workers have less monopoly power
c) if firms have monopoly power but workers have none
d) if both firms and workers have monopoly power
e) if there is no monopoly power

Back 13

d) if both firms and workers have monopoly power

Front 14

14. Which of the following would not give workers some degree of monopoly power?
a) learning by doing
b) labor unions
c) highly specialized human capital
d) high rates of short term unemployment
e) high costs of job turnover and training incurred by employers

Back 14

d) high rates of short term unemployment

Front 15

15. If firms seek an average markup of 25% over labor costs, and this is consistent with
labor demands at the natural rate, then in the long run
a) real wages will be 25% of the price level
b) prices will be 4 times greater than wages
c) wages will rise 80 cents for every $1 increase in prices
d) wages will fall 25 cents for every $1 increase in prices
e) prices will rise 25 cents for every $1 increase in wages

Back 15

c) wages will rise 80 cents for every $1 increase in prices

Front 16

16. When the unemployment rate is below the natural rate,
a) wages and prices will begin to rise and employment will fall
b) real wages will fall and employment will increase
c) prices will fall, and unemployment will rise
d) the natural rate will increase to restore equilibrium
e) the unemployment rate will rise, but neither prices not wages will change

Back 16

a) wages and prices will begin to rise and employment will fall

Front 17

17. If firms seek an average markup of 25% over labor costs and workers demand real
hourly wages equal to $10 – 100u where u is the unemployment rate, then the equilibrium
rate of unemployment will be
a) 4.6%
b) 8%
c) 9.2%
d) 10%
e) 25%

Back 17

c) 9.2%

Front 18

18. Which of the following is the least likely to influence the natural rate of
unemployment? a) monopolies in the goods market
b) labor unions
c) payroll taxes
d) unemployment insurance benefits
e) monetary policy

Back 18

e) monetary policy

Front 19

19. The replacement ratio is defined as
a) The cost of replacing a worker
b) The cost of employing a new worker relative to the value of output they could
produce
c) The cost of replacing capital relative to the book value of existing capital
d) Unemployment benefit as a share of previous earnings
e) None of the above

Back 19

d) Unemployment benefit as a share of previous earnings

Front 20

20. In most developed economies, unemployment insurance benefits
a) are nonexistent
b) paid for by insurance companies
c) initially replace 100% of lost wages
d) replace an increasing percentage of lost earnings as the duration of unemployment
becomes prolonged
e) become less generous as the duration of unemployment is prolonged

Back 20

e) become less generous as the duration of unemployment is prolonged

Front 21

21. Unemployment insurance benefits increase productivity most by
a) shortening the duration of unemployment
b) providing replacement rates that are lower than real wages
c) shifting government funds away from less productive ventures
d) helping to improve the match-up between jobs and workers
e) weakening monopoly power

Back 21

d) helping to improve the match-up between jobs and workers

Front 22

22. Long term unemployment causes all of the following except
a) depreciation of human capital
b) reduced probability of reemployment
c) reduced intensity of job search
d) increased unemployment insurance replacement rates
e) discouraged worker effects and labor market withdrawal

Back 22

d) increased unemployment insurance replacement rates

Front 23

23. The Beveridge Curve is the relationship between
a) Unemployment and unemployment benefits
b) Unemployment and regional mismatch
c) Unemployment and the output gap
d) Unemployment and vacancies
e) Unemployment and Union membership

Back 23

d) Unemployment and vacancies

Front 24

24. Which of the following taxes has the greatest effect on the natural rate of
unemployment?
a) income taxes
b) retail sales taxes
c) Social Security taxes
d) real estate taxes
e) inheritance taxes

Back 24

c) Social Security taxes

Front 25

25. Which of the following government policies is not likely to reduce unemployment?
a) increasing payroll taxes
b) making loans to the unemployed who wish to start businesses of their own
c) providing retraining subsidies
d) offering relocation assistance to the unemployed who find work out of town
e) providing publicly funded job placement agencies

Back 25

a) increasing payroll taxes

Front 26

26. If 4% of employed workers lose their jobs each period while 76% of the unemployed
find work, then the natural rate of unemployment is
a) 4%
b) 5%
c) about 3%
d) 20%
e) 19%

Back 26

b) 5%

Front 27

27. If the rate at which workers flow from employment into unemployment each period is
6% and the flow out of unemployment occurs at a rate of 69%, then the natural rate of
unemployment is
a) 4.14%
b) 6%
c) 8%
d) 6.9%
e) 11.5%

Back 27

c) 8%

Front 28

28. If the natural rate of unemployment is 10% and 6% of employed workers become
unemployed each period, then
a) the natural rate is declining
b) 4% of the unemployed remain unemployed each period
c) the labor force is expanding at a rate of 16%
d) the outflow from unemployment occurs at a rate of 54%
e) 60% of the unemployed find employment each period

Back 28

d) the outflow from unemployment occurs at a rate of 54%

Front 29

29. In general, high unemployment is associated with
a) High levels of labour market co-ordination
b) Low levels of labour market co-ordination
c) Both high and low levels of labour market co-ordination
d) Neither high nor low levels of labour market coordination
e) Other factors and is unrelated to labour market co-ordination

Back 29

e) Other factors and is unrelated to labour market co-ordination

Front 30

30. Which of the following is not typically true of Employment Protection Legislation
(EPL)?
a) countries with strong EPL have low unemployment rates
b) EPL reduces part-time work and labor force participation rates
c) EPL reduces the layoff rate
d) EPL reduces the duration of unemployment
e) EPL benefits the employed at the expense of the unemployed

Back 30

d) EPL reduces the duration of unemployment

Front 31

17. Which of the following is not a valid argument against labor market deregulation?
a) deregulation produces income inequality
b) deregulation reduces wages
c) deregulation leads to crime
d) active labor market spending may be equally or more effective at reducing
unemployment than deregulation
e) deregulation restricts employer choices

Back 31

e) deregulation restricts employer choices

Front 32

18. In the 1990s the Netherlands reduced its unemployment rate by
a) reducing union density and coverage
b) cutting payroll taxes
c) reducing the unemployment insurance replacement rate
d) using active labor market expenditures and coordination
e) all of the above

Back 32

d) using active labor market expenditures and coordination