Chapter 7 MCQ

Question 1

suppose that a group on Facebook has five people: A. J., B. J., C. J., D. J., and V. J. The group members post the following information regarding their job status:

A. J.:  “I worked for BlueBerry Wireless this month and last month.”
B. J.:  “Last month I worked for Canwell Soup. This month I am on temporary layoff because of a temporary slowdown in the economy.”
C. J.:  “Last month I was not working, but I was looking for work. This month I accepted a part-time job at Burger Fling but was hoping for a full-time job.”
D. J.:  “I have never worked and I have never looked for work (I like to party and spin records).”
V. J.:  “I was not working and looking for work last month. This month I gave up my search for work because I was discouraged.”

Think of this group as a mini-economy. Use this scenario toanswer questions 1–11.

Question 2

B. J. would be counted as unemployed this month. T  F

Answer 2

True. Temporary layoffs count as unemployed.

Question 3

V. J. was unemployed in both months. T  F

Answer 3

False. Unemployed last month but not in the labour force this month because he gave up searching.

Question 4

Between last month and this month, the number of employed persons stayed the same, but the number of unemployed decreased. T  F

Answer 4

True. V. J. went from unemployed to not in the labour force.

Question 5

Between last month and this month, the unemployment rate increased. T  F

Answer 5

False. Number of employed stayed the same and number of unemployed decreased, so unemployment rate decreased. Last month it was 50% = unemployed ÷ labour force × 100 = 2 ÷ (2 + 2) × 100. This month itwas 33% = 1 ÷ (1 + 2) × 100.

Question 6

If discouraged workers and involuntary part-time workers were counted in the official definition of unemployed, unemployment would have increased between last month and this month. T  F

Answer 6

True. C. J. and V. J. would then count as unemployed.

Question 7

B. J. is cyclically unemployed this month. T  F

Answer 7

True. Due to business cycle.

Question 8

There is full employment this month. T  F

Answer 8

False. B. J. is cyclically unemployed, so no full e­mployment.

Question 9

If C. J. and V. J. were both structurally unemployed last month, then this economy had a recessionary gap last month. T  F

Answer 9

False. There was no cyclical unemployment if A. J. and B. J. are employed, C. J. and V. J. are structurally unemployed, and D. J. is not in the labour force.

Question 10

V. J. is planning C. J.’s stag party (a party for a bachelor shortly before marriage). C. J. loves economics and V. J. wants to make up T-shirts for the stag that describe the current state of the economy. If average prices are rising and output is decreasing, the shirts should say stagnation. T  F

Answer 10

False. Stagflation, not stagnation, if prices are rising and output is decreasing.

Question 11

A. J. is a nonsmoking vegetarian who walks to work and lives with his parents. If increases in A.J.’s wage were linked to increases in the CPI — and prices of gasoline fuel, housing, meat, and tobacco were on the rise — then the wage increase would underestimate A. J.’s true cost of living increase. T  F

Answer 11

False. It would overestimate A. J.’s true cost of living increase since A. J. does not consume the products and services rising in price so does not have an increase in his cost of living.

Question 12

V. J. wants to invest his savings with a bank. The bank pays an interest rate of 2 percent and the inflation rate is 2 percent. The real interest rate is 4 percent. T  F

Answer 12

False. Real interest rate is zero equals nominal interest rate minus the inflation rate.

Question 13

According to the quantity theory, if 20 percent more money is printed, average prices increase by 20 percent. T  F

Answer 13

True. Increase in quantity of money causes equal percentage increase in inflation rate.

Question 14

If the quantity of money is $50 and nominal GDP is $100, the velocity of circulation is 0.5. T  F

Answer 14

False. Velocity = 2 because M × V = 100, and M = 50.

Question 15

If the unemployment rate is lower when inflation is higher, this evidence supports the Phillips Curve. T  F

Answer 15

True. Inverse relation between unemployment rate and inflation rate.

Question 16

If the unemployment rate is lower when inflation is higher, this is evidence of cost-push inflation. T  F

Answer 16

False. With cost-push inflation, inflation and unemployment change in the same direction.

Question 17

Who would be counted as unemployed?

Sirena is a college student with no job.

Miguel starts a new job in a week.

Reetu stopped looking for work because she was unable to find a job.

Rajinder is working part-time but wishes he was working full-time.

Answer 17

b) Miguel is frictionally unemployed.

Question 18

If Salma loses her job and starts looking for work, the

number of employed increases.

labour force increases.

labour force decreases.

labour force participation rate remains unchanged.

Answer 18

d) Working or searching for work, Salma is part of labour force.

Question 19

Suppose that there are 19 million people employed, 1 million unemployed, and 25 million people 15 years of age or older. Which statement is true?

The labour force is 19 million.

The labour force participation rate is 80 percent.

The unemployment rate is 4 percent.

The unemployment rate is 1 percent.

Answer 19

b) (20 million ÷ 25 million) × 100 = 80 percent.

Question 20

Suppose that there are 19 million people employed, 1 million unemployed, and 25 million people 15 years of age or older. Which statement is true?

The labour force is 19 million.

The labour force participation rate is 80 percent.

The unemployment rate is 4 percent.

The unemployment rate is 1 percent.

Answer 20

d) There is lower labour force participation and fewer students are working.

Question 21

Alberta’s 2.9 percent unemployment rate in June 2007 was the lowest of any province. High labour demand and wages in Alberta encouraged unemployed workers from Newfoundland and Labrador to move to Alberta, where they found jobs. This increased the

unemployment rate in Newfoundland and Labrador.

labour force in Newfoundland and Labrador.

unemployment rate in Alberta.

labour force in Alberta.

Answer 21

d) Those seeking work moved to Alberta.

Question 22

Close to 567 000 additional people became officially unemployed between October 2008 and March 2009, and another 236 000 either gave up looking because they were discouraged, expected to be called back, or were involuntary part-timers. If the 236 000 individuals were counted as unemployed, then the number of people

employed would decrease.
unemployed would decrease.
unemployed would increase.
not in the labour force would increase.

Answer 22

c) Discouraged workers are officially not counted as unemployed.

Question 23

In the year grade 13 was eliminated in Ontario, grade 12 students and grade 13 students graduated at the same time. This increased the number of people leaving school to find jobs. What form of unemployment was likely to be unusually high thatyear?

Seasonal unemployment
Frictional unemployment
Structural unemployment
Cyclical unemployment

Answer 23

b) Part of normal labour turnover and job search for that year.

Question 24

There is a recessionary gap when the unemployment rate is

below the natural rate.
above the natural rate.
at full employment.
at the natural rate.

Answer 24

b) Unemployment above the natural rate means cyclical unemployment.

Question 25

If the CPI was 120 in 2015 and 126 in 2016, then the inflation rate was

5 percent, which is above the Bank of Canada’s target range for inflation.

5 percent, which is within the Bank of Canada’s target range for inflation.

20 percent, which is above the Bank of Canada’s target range for inflation.

20 percent, which is within the Bank of Canada’s target range for inflation.

Answer 25

a) (126 – 120) ÷ 120 × 100 = 5 percent, above theBank of Canada’s target range for inflation of 1 to 3 percent.

Question 26

What does the inflation rate miss?

New products

Better products

Switches to cheaper substitutes

All of the above

Answer 26

d) Not measured in the official calculation.

Question 27

Inflation can harm those who

are living on fixed incomes.
keep money under their bed.
save money in the bank.
all of the above.

Answer 27

d) Inflation reduces purchasing power of money.

Question 28

The number of times a unit of money changes hands during a year is called

money supply.
velocity.
price.
real GDP.

Answer 28

b) Definition of velocity.

Question 29

Which factors are fixed in the quantity theory of money?

Money and velocity

Velocity and real GDP

Velocity and price

Price and real GDP

Answer 29

b) Velocity fixed and real GDP = potential GDP.

Question 30

If the Phillips Curve is true, which of the following could never happen?

Invention of the Phillips screwdriver

Stagflation

Stagnation

Inflation

Answer 30

b) Stagflation combines high unemployment and high inflation.

Question 31

Economists believed there was a clear trade-off between unemployment and inflation until the

1950s.
1970s.
1990s.
2000s.

Answer 31

b) OPEC oil price shocks occurred in the 1970s.

Question 32

The summer job market for​ post-secondary students starts in May. In May​ 2014, 61,000 more students were employed compared to a year earlier. These​ students’ labour force participation rate also rose over the​ year, from 66.11​% to 75.97​%. Assuming that the​ working-age population of students does not​ change, what is the correct interpretation of these​ results?

A.
Fewer students were in the labour force.
B.
Fewer students were working.
C.
More students were looking for work.
D.
More students were in the labour force.

Answer 32

D.
Participation Rate = Labour Force / Student’s Working - Age Population

In May​ 2014, the​ students’ labour force participation rate rose over the​ year, from 66.11​% to 75.97​%. ​Therefore, assuming that the​ working-age population of students did not​ change, more students were in the labour force.

Question 33

Suppose that 20 million people are​ employed, 2 million people are​ unemployed, and 35 million people are 15 years of age or older. Which of the following statements is​ true?

A.
The unemployment rate is 18​%.
B.
The labour force participation rate is 20 %.
C.
The size of the labour force is 20 million.
D.
The unemployment rate is 9.1 %.

Answer 33

D.

Question 34

If Salma starts working part time​, she is

A.
unemployed.
B.
a discouraged worker.
C.
employed.
D.
none of the above.

Answer 34

C) Employed

If Salma starts working part time​, she is employed. Statistics Canada places everyone in​ working-age population​ (age 15 and​ over) into one of three​ categories:
​- Employed​ - working​ full-time or​ part-time at paid job
​- Unemployed​ - not doing paid work and actively searching for​ job, or on temporary​ layoff, or about to start a new job
​- Not in the labour force​ - does not fit into employed or unemployed categories​ (full-time student,​ homemaker, retiree)

Question 35

Who would be counted as unemployed​?

A.
Sirena​, who lost his job at the power plant and is not looking for work.
B.
Rajinder​, who is retired.
C.
Miguel​, who is working part time at a​ fast-food restaurant.
D.
Reetu​, who lost her job as a teacher and is currently searching for a new job.

Answer 35

​D.

Reetu, who lost her job as a teacher and is currently searching for a new​ job, is in the labour force and unemployed.

Question 36

Upper A Prince Edward Island fishery worker is searching for a better job closer to home. This is an example of

A.
frictional unemployment.
B.
cyclical unemployment.
C.
structural unemployment.
D.
underutilized unemployment.

Answer 36

A.

If a Prince Edward Island fishery worker is searching for a better job closer to home​, then it is an example of frictional unemployment.

Question 37

An office worker has lost her job because of a general slowdown in economic activity. This is an example of
Part 2
A.
frictional unemployment.
B.
structural unemployment.
C.
cyclical unemployment.
D.
underutilized unemployment.

Answer 37

C. Cyclical unemployment

Question 38

The natural rate of unemployment does not include which of the​ following?

A.
cyclical unemployment
B.
frictional unemployment
C.
seasonal unemployment
D.
The natural rate of unemployment includes all of the above.

Answer 38

A.

The unemployment rate associated with full employment is called the natural rate of unemployment long dashthe rate when there is only​ frictional, structural, and seasonal unemploy

Question 39

If the economy goes into a contraction​,

A.
the unemployment rate exceeds the natural rate.
B.
there is no frictional comma structural comma or seasonal unemployment.
C.
the economy is working overtime.
D.
real GDP rises above potential GDP.

Answer 39

A.

If the economy goes into a contraction​, the unemployment rate exceeds the natural rate​; additional unemployment is cyclical unemployment​; and real GDP falls below potential GDP.

Question 40

An unemployment rate of zero percent cannot be expected since

A.
some portion of the labour force will always be between jobs.
B.
the economy can never create enough job vacancies.
C.
there are some people who do not want to work.
D.
there will always be discouraged workers.

Answer 40

D.

Full employment is not zero percent unemployment. It includes​ frictional, structural, and seasonal unemployment. Since it does not include cyclical​ unemployment, at full employment there is zero percent cyclical unemployment.

Question 41

There is an inflationary gap when the

A.
unemployment rate is at full employment.
B.
unemployment rate is above the natural rate.
C.
economy is at zero percent cyclical unemployment.
D.
unemployment rate is below the natural rate.

Answer 41

d.

There is an inflationary gap when the unemployment rate is below the natural rate.

Question 42

There is a recessionary gap when the

A.
economy is at zero percent cyclical unemployment.
B.
unemployment rate is at the natural rate.
C.
unemployment rate is above the natural rate.
D.
unemployment rate is below the natural rate.

Answer 42

D.

Question 43

An unemployment rate of zero percent cannot be expected since

A.
the economy can never create enough job vacancies.
B.
there will always be discouraged workers.
C.
there are some people who do not want to work.
D.
some portion of the labour force will always be between jobs.

Answer 43

D.

Question 44

If the economy goes into a contraction​,

A.
real GDP falls below potential GDP.
B.
then real GDP is equal to potential GDP.
C.
real GDP rises above potential GDP.
D.
the unemployment rate is less than the natural rate.

Answer 44

A.

Question 45

Inflation is

A.
a sustained increase in wages.
B.
a rise in the value of money.
C.
a fall in the value of money.
D.
all of the above.

Answer 45

C.

Inflation is both a persistent rise in average prices and a fall in the value of money. When inflation​ occurs, you must spend more just to get the same​ products/services as before. Your money is worth less.

Question 46

The CPI in 2020 was 118. In 2019 it was 113. The inflation rate between 2019 and 2020 was

A.
-4.24​%.
B.
7.07​%
C.
4.42​%.
D.
3.54​%.

Answer 46

The inflation rate equals left

(118-113 / 113) X 100 = 4.42%

Question 47

Inflation benefits

A.
savers.
B.
all consumers.
C.
all producers.
D.
borrowers.

Answer 47

d. Borrowers

Inflation decreases the purchasing power of money you have in the bank. Inflation benefits borrowers. When consumers or businesses pay back​ loans, they are paying back less valuable dollars long dashin purchasing power long dashthan the dollars they borrowed.

Question 48

Japan experienced a decade of
______ (deflation/inflation)
after its real estate bubble burst in 1991.

Partly as a result of this​ event, the Japanese economy experienced two decades of

A.
economic stagnation.
B.
economic growth.
C.
​diversity, creativity, and change.
D.
all of the above.

Answer 48

Deflation

A.

Partly as a result of the destructive downward spiral of​ deflation, the Japanese economy suffered two decades of economic​ stagnation, almost no​ growth, and significant unemployment.

Question 49

A basket of products and services cost ​$500 in the base year. If the Consumer Price Index​ (CPI) in the current year is 200​, then the cost of the basket of products and services in the current year is

A.
​$1,500.
B.
​$700.
C.
​$300.
D.
​$1,000.

Answer 49

D.

To make it easier to compare​ years, prices are measured against a base year. If he cost of a basket for that year is​ $100 and the CPI for the current year is 200​, then the cost of the basket in the current year would be ​$200. ​However, we are told that the basket of products and services cost ​$500 in the base year.
​Thus, the cost of the basket of products and services in the current year is ​$500 X 200 ​/ 100​ = ​$1,000.

Question 50

If a basket of products and services cost ​$400 in the base year and ​$800 in the current​ year, the Consumer Price Index​ (CPI) in the current year is

A.
0.50.
B.
200.
C.
400.
D.

Answer 50

B.

To make it easier to compare​ years, prices are measured against a base year. If he cost of a basket for that year is​ $100 and the CPI for the current year is 200​, then the cost of the basket in the current year would be ​$200.
In other​ words, if the cost of a basket for the base year is​ $100, and the cost of the basket in the current year is ​$200​, then the CPI for the current year is 200.
​However, we are told that the basket of products and services cost ​$400 in the base year and ​$800 in the current year.
​Thus, the CPI in the current year is ​$800 ​/ ​$400 X 100 ​= 200.

Question 51

The velocity of money is

A.
the time it takes to produce money.
B.
a measure of average prices of fixed shopping basket of products and services.
C.
the number of times per year a dollar is spent on final goods and services.
D.
the time it takes for monetary policy to have an effect on world financial markets.

Answer 51

C.

The quantity theory of money explains inflation from an increase in the quantity of money in an​ economy, holding constant the velocity of money and the quantity of real output. The velocity of money is the number of times a unit of money changes hands during a year.

Question 52

If the the quantity of money is ​$1,100​, the velocity of money is 20​, and the average price is 110​, real GDP is ​$???

Answer 52

Quantity of Money x Velocity = 1100 x 20 =

Average Prices x Real GDP x ???

Quantity of Money x Velocity / Average Prices = Real GDP

1100 x 20 / 110 = 200

Question 53

The quantity theory of money assumes that real GDP is at potential GDP and does not change. If real GDP were initially above potential GDP and could​ change, what do you think would happen when the quantity of money decreases​?

A.
The price and real GDP could both decrease.
B.
The price and potential GDP could both decrease.
C.
The price and potential GDP could both increase.
D.
The price and real GDP could both increase.

Answer 53

A.

A decrease in the quantity of money encourages consumers to buy less stuff. As consumers buy less ​stuff, the prices of products and services fall. And consumers will continue to offer less money. In this​ case, real GDP is above potential​ GDP, so the decrease in the money supply could also decrease real GDP. Since MtimesV​ = PtimesQ​, if M changes and V stays the​ same, then the product of PtimesQ must also change in the same​ direction; thus, the decrease in the money supply may result in decrease in both the price and real GDP.

Question 54

According to the quantity theory of​ money, a decrease in the quantity of money causes

A.
an equal percentage decrease in average prices.
B.
an equal percentage increase in average prices.
C.
a lower percentage increase in average prices.
D.
a higher percentage decrease in average prices.

Answer 54

A.

According to the quantity theory of​ money, a change in the quantity of money causes an equal percentage change in average prices. If there is a decrease in the quantity of​ money, there will be an equal percentage decrease in average prices causing the inflation rate to fall​, or causing a negative inflation rate.

Question 55

When there is demand – pull ​inflation, prices rise and unemployment

A.
falls.
B.
is constant.
C.
rises.
D.
falls or rises.

Answer 55

A.

When there is​ demand-pull inflation, rising average prices are caused by increases in demand. Demand is a key force pulling up​ employment, wages, and outputs. When there is​ cost-push inflation, rising average prices caused by decreases in supply push up output​ prices, lower​ employment, or increase unemployment

Question 56

The Phillips Curve shows

A.
a direct relation between unemployment and inflation.
B.
an inverse relation between the interest rate and exchange rate.
C.
a direct relation between the tax rate and tax revenues.
D.
an inverse relation between unemployment and inflation.

Answer 56

D.

The​ trade-off between unemployment and inflation was made famous by a New​ Zealand-born economist named A.W. Phillips. He examined data for the United Kingdom from 1861 to 1957 that showed an inverse relation​ (when one goes​ up, the other goes​ down) between unemployment and inflation. In years when the unemployment rate was​ lower, the inflation rate was higher. In years when the unemployment rate was​ higher, the inflation rate was lower. The visual representation of that data took the form of a​ curve, which became known as the Phillips Curve.

Question 57

Negative supply shocks cause

A.
falling unemployment.
B.
increases in GDP.
C.
cost -push inflation.
D.
demand -pull inflation.

Answer 57

C.

Supply shocks are events that directly affect​ businesses’ costs,​ prices, and supply – they are not caused by changes in demand. Negative supply shocks​ (such as,​ say, energy price​ increases) cause​ cost-push inflation and stagflation.

Question 58

Stagflation occurs when

A.
both inflation and unemployment are rising.
B.
both inflation and unemployment stay constant.
C.
both inflation and unemployment are falling.
D.
inflation is falling and unemployment is rising.

Answer 58

A.

In​ cost-push inflation, rising average prices are triggered by decreases in supply.​ Supply, not​ demand, plays the leading role in this story. A decrease in supply caused by increasing costs is the key force pushing up output prices. While average prices are​ rising, sales of products and services are decreasing. Decreases in output means real GDP decreases. Since businesses are cutting back​ production, unemployment increases. So the economy experiences a double dose of bad news – higher inflation and higher unemployment – also called stagflation. The word stagflation is a combination of stagnation – the economy is standing still or falling into​ recession, with higher unemployment – and the rising prices of inflation