Core Economics 3e

Inflation and Unemployment

Multiple Choice Questions

After watching the Inflation and Unemployment video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Inflation is a(n):

increase in output.

general rise in prices.

increase in total economic activity.

rise in productivity.

Question

2. Inflation is considered a tax on savings. This is because the:

government increases taxes on savings when inflation is high.

growth in savings increases when inflation is present.

purchasing power of savings declines as inflation rises.

number of savings instruments declines as inflation increases.

Question

3. A frequently used measure of inflation is the:

consumer price index.

federal funds rate.

purchasing managers’ index.

marginal tax rate.

Question

4. To be considered unemployed, one must not be working and must have actively looked for work in the past 4 weeks. This definition _____ the unemployment rate.

overstates

understates

exaggerates

accurately captures

Question

5. An example of frictional unemployment is:

part-time workers seeking full-time employment.

postal employees losing their job because email has replaced snail mail.

new graduates looking for a job but not yet finding work.

employees losing their job because of a recession that causes a decline in demand for the product their company produces.

Question

6. Which type of unemployment do policy makers seek to control?

cyclical

structural

seasonal

frictional

Question

7. Cyclical unemployment occurs when:

employees voluntarily leave a job to seek a better one.

technological developments superannuate the products of certain companies, causing the firms to fail.

employees voluntarily take time off between jobs.

demand is insufficient to keep businesses fully operating.

True/False Questions

After watching the Inflation and Unemployment video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Inflation and unemployment are sometimes called the twin evils of the macroeconomy.

True

False

Question

2. Inflation increases purchasing power because wages typically rise with the prices of goods.

True

False

Question

3. Structural unemployment would result from a furniture manufacturer closing a U.S. plant to make its products in China.

True

False

Short Answer/Discussion Questions

After watching the Inflation and Unemployment video lecture, consider the question(s) below. Then “submit” your response.

Question

1. Explain how high inflation and high unemployment can reduce standards of living.

Suggested solution: Because high unemployment reduces the income of a sizable proportion of the populace, the affected individuals are less able to purchase the goods and services they desire. This reduced consumption constitutes a decline in standard of living. High inflation (driven by a rise in prices) reduces the purchasing power of savings, hence the standard of living. (Answers may vary.)

Question

2. Describe the factors that result in the official unemployment rate understating the level of unemployment in the United States.

Suggested solution: The unemployment rate results from total number of people employed relative to the total size of the labor force. Because the U.S. government considers a part-time worker as employed even if that person wants full-time employment, the number of employed persons is overstated, decreasing the unemployment rate. Further, the government’s statisticians consider those who return to school because they can't find a suitable job or who cease looking for work because they are discouraged as not being members of the labor force. This understates the size of the labor force and understates unemployment.

Question

3. Describe the two components of the natural unemployment rate.

Suggested solution: The two components of natural unemployment are frictional and structural unemployment. Frictional unemployment includes graduates looking for their first job and employees who leave jobs to search for better ones or who choose to take time off between jobs. Structural unemployment is caused by changes in the overall economy. A change such as unemployment caused by jobs moving offshore or new technology that renders skills or products obsolete drives structural unemployment. (Answers may vary.)